August 2, 2022
Market Monitor: July Update
Headlines and Highlights
- Markets log best month in two years: Stocks and other risky assets saw significant gains in July as investors took heart from better-than-expected corporate earnings and hopes that the Federal Reserve will slow its pace of interest-rate hikes as the economy cools further. Benchmarks for U.S. large- and small-cap stocks, international stocks and REITs all had their biggest monthly returns since November 2020. Bonds also delivered their best performance since early in the pandemic as rates fell sharply amid growing evidence of a global slowdown.
- Economy shrinks for second straight quarter: S. economic activity contracted at an annual rate of 0.9% from April through June as four-decade-high inflation and tighter financial conditions tilted growth negative for the second quarter in a row. Coupled with a 1.6% contraction from January through March, the back-to-back declines reflect an ongoing slowdown and meet a commonly used definition of a recession. The National Bureau of Economic Research also considers jobs, manufacturing and real incomes in determining whether there has been a recession, however, and those categories continue to thrive.
- Fed stays aggressive in inflation fight: The Federal Reserve as expected raised its target interest rate by three-quarters of a percentage point for the second time in just over a month, aiming to combat inflation by slowing the economy further. Its fourth increase since mid-March brings the target rate to a range of 2.25%-2.5%. Fed Chair Jerome Powell said the central bank will press ahead with its inflation crackdown but may slow the pace of rate increases as the economy takes a bigger hit from the tightening.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- Regardless of whether this economic slowdown is ultimately declared a recession, we believe chances are low of a severe, extended slump. While manufacturing growth is softening, the labor market is still solid, consumer spending remains heavy and corporate earnings are growing. While additional rate hikes will add to pressure, the U.S. economy is likely to return to growth in the second half.
- U.S. inflation has persisted at 40-year highs for longer than expected. However, a price cooldown appears under way in several areas, including the housing market, furthering our belief that it will gradually moderate.
- The Federal Reserve has capitalized on the economy’s stability to front-load the bulk of its expected interest-rate increases and could ease its tightening sooner than expected. The Fed last week pointedly dropped its practice of forward guidance on future rate hikes, providing itself with more flexibility to back off on its aggressive policy once there is strong evidence of inflation heading back down.
- Further turbulence is likely before the stock market proves it is on a sustainable path to full recovery from this year’s losses. But whether or not stocks have bounced off their bear-market lows for good, July’s rally demonstrated investors’ willingness to buy into the market well ahead of strengthening economic fundamentals. The stock market already has priced in a mild recession, and bonds again are performing their role as portfolio buffers after an unusually poor first half.
- The dollar’s steep upward climb against other major currencies has weighed on the performance of dollar-denominated international stocks this year. Their lower relative valuations remain a plus, however, and non-U.S. stocks will get an additional tailwind whenever the dollar inevitably weakens.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice