Last week was a big one for the financial markets in terms of key economic data that could give indication as to the overall health of the economy and course moving forward. The second quarter GDP (gross domestic product) reading came in below consensus estimates at -0.9% quarter-over-quarter annualized. This is the second consecutive quarter of negative GDP growth, signaling (by some definitions) the technical definition of a recession. Also, the Federal Reserve raised interest rates by 75 basis points (0.75%) – as expected – in its continuing efforts to curb decades-high inflation. Finally, several top large-cap companies – including Apple, Microsoft, and Amazon – reported earnings last week. Overall, this earnings season has generally met or surpassed its lowered expectations. Through it all, U.S. equities surged to end out a strong month.
The S&P 500 finished the month of July better than 9%, while the Nasdaq Composite and Dow Jones Industrial Average finished up over 12% and 6%, respectively. Interest rates continued to retreat from their highs this year set in mid-June, with the 10-year Treasury yield now down 25% from its highs this year. Lower interest rates are of big significance because this could be a reflection of inflation peaking, which would in turn serve as confirmation data to the Federal Reserve to take a less aggressive posture moving forward – which would be good for the equity markets.
While we may have met the technical definition of a recession with two consecutive quarters of negative GDP, it’s important to note other areas of the economy, such as employment and consumer spending, remain at reasonable levels. This, along with other data, is why the National Bureau of Economic Research has not officially declared that the economy is in a recession.
Is this a bear market rally, or is the bottom in place? The S&P 500 monthly momentum indicators have improved but remain negative, as expected, heading into August. Another piece of noteworthy technical data – the S&P 500 index moved back above its 50-day moving average on July 19th, and at the end of the month met its 100-day moving average for the first time since early April. While still a little ways below its 200-day moving average, this chart suggests we may be seeing the reversal of trend.
Of course, time will tell if the worst of this bear market is behind us. Among other things, we would look for the monthly momentum to return to positive at the end of a month before reassuming a more risk-on position. Currently, the S&P 500 would have to finish the month of August at around 4350 – a rise of a little over 5% – for that to happen. We expect the prospects of that happening to be muted by economic and earnings data continuing to come in weaker and interest rates possibly rising again as the Fed continues to raise interest rates.
In summary, we are:
- 50% equities, 50% cash
Objectives: For our core portfolios, our objective is growth with a reasonable level of risk. Our portfolios are actively managed, and we adjust our exposure to the stock market based on technical and economic factors. When appropriate, we may reduce or eliminate our stock market positions in order to preserve capital.
As always, I appreciate the opportunity to serve as your advisor and partner with you in reaching your financial goals. Wishing you and yours well!
This column expresses our views and opinions as of the date of publishing. Those views can change at a moment's notice when the market changes.
Disclosure: Choice Wealth Management, LLC is a registered investment advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.