Weekly Market Update: August 8, 2022
The U.S. economy has been performing in a mixed fashion lately. According to the widely held definition (two consecutive quarters of contracting gross domestic product), the U.S. economy has technically entered recession territory. The headline news, however, may not reveal the full story. As of the July report, the labor market was still in good shape, and the unemployment rate stood at 3.5%, which is considered a low reading. In past recessions, the job market has weakened considerably, and that does not seem to be the case in the current environment.
The Federal Reserve will probably remain in the spotlight for some time. The central bank implemented another 75-basis-point interest-rate hike at its July meeting, and will probably tighten monetary policy further. Nonetheless, the Federal Reserve did provide indications that its efforts are beginning to cool the economy, and investors seemed satisfied. It should be mentioned that even the latest economic reports tend to lag present conditions. Also, for some items, like commodities, prices are starting to soften, and this development should alleviate some inflationary pressures.
Meanwhile, earnings season is ongoing. At this writing, just over half of the corporations in the S&P 500 Index have reported their numbers. Although roughly 70% of these companies have managed to surpass analyst expectations, results have exceeded by only a narrow margin, and guidance for the rest of the year has been lackluster. In many cases, management teams have mentioned downsiz- ing and reductions in spending.
Nonetheless, the stock market has been performing notably better. In July, the broader equity averages staged a constructive rally, and many stocks are better positioned from a technical perspective. A wide range of stocks are participating in the price performance. Investors have been rotating additional capital into the technology and consumer stocks that had already led the rally. In contrast, several months ago, capital was tightly concentrated in the energy and utility issues.
Conclusion: While equity valuations still seem reasonable, in the current environment we recommend investors remain cautious. Given the complex market dynamics, volatility should be expected.