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Equities and Bonds Finish Strong in July as Fed Shifts on Inflation Fight

August 8, 2022

Despite subdued price action for the first two weeks of July, the month finished on a strong note following the Federal Reserve’s policy remarks and better than feared corporate earnings. The S&P 500 Total Return Index produced a return of 9.22% recapturing a little over one third of its year-to-date losses. Outperforming the S&P 500 for the month, the NASDAQ Total Return Index and the Russell 2000 Total Return Index returned 12.39% and 10.44% respectively. A dovish Federal Reserve tone on reaching near neutral policy levels backs a bulk of July’s market rally. The July Fed meeting also concluded with the decision to raise the benchmark interest rate .75% in attempt to rein in inflation. The back-to-back .75% policy rate increases by the Federal Reserve are the biggest consecutive hikes in nearly 40 years dating back to the early 1980s.1

For much of 2022 the Fed has attempted to telegraph future rate hikes, sometimes months in advance. A move that in hope would bring additional transparency to financial markets during a rising rate environment. Consequently, as inflation stormed through the US economy, the Fed backtracked their approach moving forward. During the July press conference, Fed Chair Jerome Powell pledged a shift in strategy that will offer less future guidance but allow for swifter policy decision driven by incoming data on a meeting-to-meeting basis. Equities marched higher alongside the Federal Reserve’s refreshed strategy to anchor inflation. Bonds also rallied as yields declined across the curve.

The back half of July also covered a densely packed second quarter earnings season. By the end of the month, over 50% of the S&P 500 reported second quarter results. Overall current year guidance remained intact for the remainder of the year and earnings proved better than previously feared.  As the second quarter Gross Domestic Product (GDP) numbers signaled the US Economy had entered a technical recession, as defined by two consecutive declining quarters of GDP, the analytical definition remains untested as consumer spending and labor markets remained robust.2 Equities continued their leg higher to end the month on a positive note.

Even so, markets continue to trade well below their all-time highs. There is still a great deal of uncertainty surrounding the domestic economy through lower real GDP trends, higher year over year inflation, and continued economic pressure from tightening monetary policy measures. We still anticipate the investment landscape to remain quite volatile and tricky in the near-to-intermediate term until a clearer long term economic trend emerges, and price stability is restored.

Brian Rosso, CFA
Portfolio Management Analyst

1https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation

2https://fred.stlouisfed.org/series/GDPC1

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

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