Turning the Bend with Cautious Optimism
August 18, 2022
August continues the summertime’s flurry of economic activity. While the S&P 500 is still down for the year (-10.2%YTD), recent gains suggest an investor rally at positive macro news (+3.3% during the week of Aug. 12). In mid-August, we learned that the August Consumer Price Index (CPI) increased 8.5% from last year, a drop from 9.1% in July and an indication that we are past “peak inflation.” The Federal Reserve raised short-term rates by 0.75% to 2.25-2.50% and indicated that it is willing to slow the economy to fight inflation. Q2 real GDP fell by 0.9%: the second straight quarter of negative real GDP growth in the United States.
While two quarters of negative GDP growth is a common sign of a recession, the last two quarters haven’t fit the usual pattern. Q1’s negative real GDP was significantly impacted by Omicron shutdowns and related shocks to the supply chain. And Q2’s negative growth was impacted by the Federal Reserve’s rate increases this year, which have affected real-estate investment and inventory destocking. In contrast to these negative indicators, the labor market is still strong – and over half of the companies that have reported second quarter earnings have beaten expectations. Given the mixed data, we may need to see another quarter of negative growth and additional data points to confirm whether we’re in a recession.1
Despite the mixed macroeconomic news in July, stock and bond markets rallied in the US. The S&P 500 Index rallied over 9% while the Nasdaq Composite rallied 12%. The 10-year US Treasury rate fell to 2.67% from a high of 3.49% in mid-June. The 2-year US Treasury ended July yielding 2.89%, an inversion of the yield that indicates the bond market expects a recession.
Overall, the financial markets appear to be getting comfortable with the Federal Reserve’s actions to tame inflation, which may cause a mild recession. Markets seem to understand that, while raising short-term rates in the coming months, the Fed will lower rates in the future.
When we last wrote, we recommended staying the course after the S&P 500 entered a bear market in June. Our recommendation remains to stay invested in the long-term portfolio you’ve worked on with your advisor. As we noted last month, the stock market tends to have good long-term returns, but can be surprisingly volatile in the short term. Making changes in your portfolios at market lows can cause investors to miss out on future returns, so it’s more prudent to reevaluate your portfolio after the market rebounds.
If you’ve found the recent volatility to be more than you previously thought you could handle comfortably, we encourage you to speak with your advisor. Our team at Farther is happy to help you reevaluate your risk tolerance and make a plan to adjust for changing circumstances.