ND&S Weekly Commentary (7.25.22) – Bad News is Good News

July 25, 2022

The markets continued their summer rally, as investors welcomed signs of a slowing economy, possible peaking inflation, and earnings results that have come in better than feared.

For the week, the S&P 500 gained 2.6%, the DJIA was up 2.0%, and the tech-heavy Nasdaq gained 3.3%. International stocks sprang back with developed markets (MSCI-EAFE) soaring 4.4% and emerging markets increasing 3%. The second quarter earnings season is in full swing, with about a fifth of the S&P 500 companies reporting last week. Over two-thirds of the companies have exceeded their estimates. The S&P 500 is down 16.1% year-to-date and trading at 16.6 times expected earnings over the next twelve months. That is down from 21 times at the end of 2021.

The bond market also gained as the U.S. 10-year Treasury Note fell from 2.93%, the previous week, to 2.77%, its lowest level in nearly two months. Commodity prices have deflated with oil at $94.70 per barrel, down over 20% from its recent peak. Two economically sensitive commodities, copper and lumber have also fallen from their highs, 32% and 60%, respectively. The driving force has been the strength of the US dollar which is now near a twenty-year high relative to foreign currencies.

On the economic front, the job market might be cooling with weekly jobless claims hitting 251,000, the highest level in nine months. Also cooling is the housing market with existing home sales and housing starts missing consensus expectations.

Next week all eyes will be on Wednesday’s Federal Reserve meeting and a slew of corporate earnings reports for the 2nd quarter. The Fed is expected to announce another three-quarter point rate increase to the federal funds rate. Over one-third of the S&P 500 companies report, including Amazon, Microsoft, Apple, Google, and Meta Platforms. On Thursday, the Bureau of Economic Analysis will report their Q2 2022 estimate of U.S. Gross Domestic Product (GDP). GDP could be negative for the second straight quarter, which would indicate that the U.S. is in a technical recession.

We maintain a cautious posture and favor a high-quality and well-diversified portfolio to weather the expected volatility. The global economy continues to grapple with high inflation, war, and a pandemic that keeps finding ways not to end.

“Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not.” -Bill Gates