The last market update mentioned that in a mid-term election year, stocks have often rallied in the second half of the year after weakness in the first half. July certainly kicked off the second half in support of that historical trend, with all major U.S. stock indices showing their best monthly gain since November of 2020.
Growth stocks bounced more than value stocks – not surprising, since growth has led on the way down in this bear market, falling over 30% to the June low. Small cap stocks also performed well in July, making the rally more broad-based. Foreign stocks, though they bounced, still trailed domestic ones. Finally, the U.S. bond market has rallied as well, led by high yield corporate bonds.
It is not surprising that markets rallied in July after an abysmal June when the S&P 500 fell into official bear market territory, but the degree of the gain was impressive. The S&P 500 and Dow recouped in July what they lost in June, while Nasdaq more than recouped its June loss. Though impressive, the gain in July merely brought stocks back to the level they were at the end of May, as shown in the following chart:
What Spurred the July Rally?
Market participants might have been scratching their heads during the July rally as nothing had really changed. Worries about the economy, inflation, and supply chain disruptions still plagued investors. But the bulk of the rally came in the latter part of the month as investors began to reset their very-low expectations for the latter half of the year.
Earnings reports in July were mixed, which was good news since investors had expected the worst and braced for mostly negative results. Also, the Federal Reserve hiked its benchmark interest rate by 0.75%, not 1% as some had feared. More importantly, Federal Reserve Chairman Jay Powell signaled that the Fed could slow its pace of rate hikes, meaning that the Fed might not need to be as aggressive going forward. All of this, combined with hopes that inflation might have peaked, helped to instill some optimism after the S&P 500 suffered its worst first-half performance since 1970.
That’s not to say that markets are out of the woods yet, as July also brought some news that might rein in higher expectations for the rest of the year. Second-quarter GDP (broad measure of economic activity) showed a decline of close to 1% after a negative first quarter. Two straight quarters of negative GDP growth are commonly considered a recession, but the official declaration must come from the National Bureau of Economic Research. Nevertheless, economic activity will most likely continue to be hampered by supply and staffing shortages.
How FSA Is Responding
Our approach to navigating market recoveries hinges on where the markets are in relation to their trend lines. Generally, portfolios will be invested when the markets are above the trend lines and in cash when the markets are below their trend lines. The timing of when we will redeploy cash as markets work their way back to and above the trend line will vary among our strategies.
When markets are recovering from downturns, there are often several fits and starts before stocks finally gain their footing in a sustained uptrend, so FSA invests cash in a measured fashion. This involves first moving in a strategy such as Core Equity, where we tend to exit inverse positions and then establish new equity positions in areas that are showing good relative strength. Some clients in our Core Equity and Tactical Growth strategies would have seen some activity in late July. If markets continue to rebound in August, then clients in our more conservative strategies will start to see allocations into equities and/or bond funds that tend to move up with equities.
We hope you have been able to enjoy the warm – though sometimes hot – summer months! Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Mary Ann Drucker
Assistant Portfolio Manager
Disclosures are available at https://fsainvest.com/disclosures/market-update/.