A Counter Rally Arrives Just In Time

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

High volatility continues to be the watchword, but on a short-term basis, things are looking up. After that sudden drop in equity prices mid-June, the situation started to improve almost immediately. That drop took the S&P 500 Index through the -20% level to -21% YTD, which is one of the signals for a Bear Market. But the S&P 500 Index was only barely into Bear Market territory, and just for two days. Since then, equities have rallied and, as of last Friday, the S&P 500 Index was down -15.38% YTD, while the DJIA was down -10.85%. It wasn’t a straight trip back up. Equity markets are still on the roller coaster we talked about in June, but with an easier ride, at least for the time being.

There was an interesting shift in leadership in July. Internet, information technology and consumer discretionary sectors have had the roughest time in 2022, but they had the strongest rallies the first three weeks of July. The S&P Composite 1500 Consumer Discretionary Index has been the top performing sector MTD, up +13.27%, still down -23.58% YTD. The Dow Jones Internet Composite Index is close behind, up +12.77% MTD, down -36.45% YTD, and the S&P Composite 1500 Information Technology Sector Index is up +9.55%, down -19.86% YTD. The only equity sector through June that was in   positive territory, the S&P Composite 1500 Energy Sector Index, has only risen +0.56% thus far in July, but is still the only sector up YTD at +31.68%. These shifts are evidence that institutional investors have not thrown in the towel on equity markets as they continue to jockey for position going into the second half of 2022.

International markets have been more muted in July. The MSCI EAFE Index is up +1.94% for the month, and remains at -18.00% YTD. The MSCI Europe Index is up +1.62% for July and is -19.51% YTD. Finally, the MSCI Emerging Markets Index is down -0.62% thus far in July and is down -18.14% YTD. It remains extremely difficult to speculate on Russia’s ultimate intentions. It is also heartening, or heartbreaking, at Ukraine’s defensive resolve and incredible costs in lives and property. Last week we saw a trade agreement and a rocket attack over two consecutive days.

Bond markets, which were deeply oversold and ripe for a rally, have also had a good July thus far. The Bloomberg U.S. Aggregate Bond Index is up +1.00%, the Bloomberg Municipal Bond Index is up +1.48%, and the Bloomberg U.S. Corporate High Yield Bond Index is up +3.79% through last Friday. All of these bond sectors remain in negative territory for the year. Rising interest rates and high inflation are still insurmountable obstacles for bond markets. That being said, bond markets continue to shadow equity markets, and counter-trend rallies are to be expected.

Price action could be dramatic later this week. Thursday, the Federal Reserve will announce their next move on interest rates, and the government releases GDP numbers for the 2nd quarter. “The talk” has been that the Fed may raise their short-term federal funds rate by a full percentage point. The federal funds rate is still way behind the inflation rate, and such an increase could easily be defended. If the Fed raised their rate less than a full percent, the reaction could go either way with financial markets, depending on who is the most encouraged and who is the most disappointed. Then we have the GDP release. Once again, “the talk” has been that the 2nd quarter will come in with a negative number, a technical signal that the U.S. economy is now in a recession. But July is also the month when the government revises past GDP numbers, going back months or even years. There is a case being made that the 1st quarter could get revised upward to a positive number, and the 2nd quarter could come in positive as well. Poof! There goes the recession, at least for a while. The reaction in financial markets could be dynamic.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2022 Edward D. Foy.   [email protected], www.foyfinancial.com .

Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.