Monthly Outlook - July 2022
In fact, it was a bear market rally that took place throughout the month of May, as the indices reversed and left the S&P down 21% on the year and the Nasdaq down 30%.
The Fed raised rates by their highest level since 1994 and the month saw the highest CPI since the 1970s as inflationary pressures continued.
We may encounter more pain in the equity markets as investors integrate future rate hikes and more durable price inflation, plus we are entering the traditionally slower summer months.
As we expected and mentioned in last month's report, bear market rallies can be strong and go far, but the fundamentals behind the economy remain weak and inflation continues unabated, we are still firmly in a medium-term correction within the long-term 2009-2022 bull market. For the S&P 500 (and despite an already sharp decline of over -20%) the 3,500 levels remain very important support that determines this bull or bear market boundary.
During the month of June, we saw powerful volatility throughout, but ended the month negatively across the board. Economic warning signs piled up and while the S&P ended the second quarter down -21% on the year and the Nasdaq down -30%, we saw the 10-year U.S. Treasury yield compress below 3% for a four-week low. Consumer spending continues to slow and signs of further pain in equity markets are evident and inflation measures such as PCE continue to rise.
As a result of high inflation, the Federal Reserve added its largest rate hike since 1994. The central bank's dual mandate of low inflation and low unemployment has only succeeded on the employment side, as the labor market remains strong. Powell has been trying to be Paul Volcker, but the situation is not comparable: economic growth in the Volcker era was much higher and interest rates were the right tool to fight inflation.
By actively acting to address this price increase, in the manner of Paul Volcker in the 1980s, the Fed could be making a triple mistake.
1) They will have little effect on the general price level because it is linked to a supply shock.
2) They would be pushing the economy into recession rather than lowering prices.
