While sell-off pressure may have eased in the second half of 2022, there’s still a lot of market fear to go around. More recently, however, the uneasiness has moved from inflation to growth.
Fresh off another 75-basis point rate hike, the U.S. Federal Reserve will be tasked with deciding on whether to keep its foot on the rate hike accelerator pedal or pump the brakes. In the meantime, investors are getting a reprieve from the downward sell-off pressure, resulting in a strong July.
“Equity markets finished July on a strong note, with the S&P 500® Index recording the first back-to-back weekly gains in four months,” notedJuly finished with a 9% gain, the best result since November of 2020 and the best July result since 1939.”
The S&P 500 is still squarely in the red for 2022, but the recent rally may be a byproduct of a simple “dead cat bounce” vis-à-vis trader speak. Looking at the fundamentals of the recent rally, it’s difficult to pinpoint any positive catalysts as inflation fears and now recession fears continue to persist.
Earnings are better than anticipated, which could have also driven the July bounce. Given the first-half market pressure, the economy has been relatively resilient as consumers adapt to a world of higher prices.
“After touching a year-to-date loss of 23% in mid-June, the Index has rallied nearly 13% to bring the total for the year to -13%,” Hackett added. “There has been little positive news to drive the rally, rather an acknowledgment that the pendulum had swung too violently from optimism at the beginning of the year to pessimism in June.”
Fear Shifting to Economic Growth
Speaking of recession fears, they’re certainly going to do a number on growth-focused names. This is already causing a shift towards more value. The value-over-growth narrative will continue to gain momentum should more volatility be in store for the rest of 2022.
The CBOE Volatility Index (VIX) is up 37% year-to-date, though it has fallen 17% within the past month, highlighting the July rally. That could be the calm before the storm should more recession talk amplify as the second half of 2022 continues.
Either way, expect volatility to strike at any moment.
“A shift in investor focus from inflation to growth fear has unexpectedly driven equity markets higher, though negative earnings revisions and deteriorating economic data suggest continued volatility is ahead,” Hackett wrote.
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