After a dismal first half of 2022 for stocks and bonds, the S&P 500 was up 9.1% for the month of July and over 12.5% off the lows, as investors saw reasons to rush back into some areas of the market that had been beaten up the worst. For example, the Nasdaq was up 12.4% last month after better-than-expected forward guidance from some of the largest companies in the world.
The Federal Reserve raised the benchmark interest rate another 0.75% to combat inflation as July’s CPI number came in hot, showing prices rising over 9% for the prior 12-month period. Powell reinforced his views on the economy remaining resilient despite what was later shown to be the second consecutive quarter of negative GDP growth – a commonly used but unofficial indicator of recessions. The National Bureau of Economic Research will ultimately determine if the economy is in a recession. Inflation will need to moderate at some point in the future for us to avoid a painful recession and the longer this high inflation sticks around, the more companies could feel the pain and begin laying off workers.
Earnings so far have more so told a story about the coming months than the previous quarter. There were some high-profile warnings in the last month which people correctly thought would lead to a bad quarter, but poor forward-looking guidance as well. Earnings for last quarter have been expectedly bad, however the guidance for future quarters has been slightly better than expected. For example, Microsoft missed estimates on both earnings and revenues, however their forward-looking outlook was much more optimistic than the market expected, and the stock was up 5% the next day.
Too often in times of stress, people are quick to expect the worst. Our minds wander to “what ifs” and possibilities instead of weighing the probabilities of those bad outcomes occurring. Remembering that portfolio growth does not come from a single day, week, or year, but rather longer time frames spent absorbing the ups and downs in the market, is an important lesson and this last month proves that. Late June exhibited extreme pessimism in consumer sentiment and sure enough we saw a slew of “not as bad as we thought” news come right afterwards.
It is times like these, when the going gets tough, the tough get going.