Market Digest: July Review

At the start of the month the market was still gripped by recession fever and speculation on how aggressively the Fed was going to move on rates. For their part, the markets priced in extremely aggressive rate hikes.

In the following weeks, the economic situation has worsened a little, as the US entered a technical recession having posted negative GDP growth for both Q1 and Q2. This has reigned in expectations of just how aggressive the Fed can act on rates, as if they move too harshly they may act as the catalyst for a more serious downturn.

For the past two decades the Fed has had the relatively simple, and successful, strategy of just cutting rates on an economic downturn. Rampant inflation means this is no longer an option. Concerns remain that we may have the first “unsupported” US recession for more than 20 years.

Could this recession gather downward momentum?

The early evidence from the market heavyweights is: probably not. Walmart did create early jitters when it dropped 10 percent as the retail giant announced it was finding it difficult to pass on higher input costs to consumers. But there have been more bright spots since, with the majority of the FAANG stocks supporting sentiment.

This has left July as being the most positive month on the S&P 500 since 2020. But how confident will the buyers be over the medium term as the major thrust of the buying has been “it is not as bad as feared” rather than “the outlook looks so positive”.

This has left many analysts still calling July’s moves as a “bear market” rally, and that the longer-term negative trend from H1 could yet regain control and push the market down to fresh lows in Q3. We suspect that more negative corporate earnings will be required to force such new lows. This could still yet occur but may not be reflected until corporate earnings in Q3.

So, the relief buying that emerged through July may be allowed to continue through August, albeit with some major headwinds remaining on just how the US economy will survive in the new high-inflation environment.

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