Weekly Commentary (8/15/22) – Everybody is a Winner

August 15, 2022

Inflation numbers were slightly more positive than the estimates and investors seized on these indicators and the good job growth and pushed prices higher. A rally that began in mid-June extended as all major equity and bond indices were positive for the week.

For the week, the DJIA gained 2.99% and the S&P 500 advanced 3.31%. The tech-heavy Nasdaq added 3.1%. International markets also had a positive week. The MSCI EAFE Index (developed countries) increased 2.17% while emerging market equities (MSCI EM) also 1.66%. Small company stocks, represented by the Russell 2000, had another strong week and ended up 4.97%. Fixed income, represented by the Bloomberg Aggregate, managed 0.24% gain for the week as, on the average, yields held their levels and corporate spreads tightened. As a result, the 10 YR US Treasury closed at a yield of 2.84% (up ~ 1 bps from the previous week’s closing yield of ~2.83%). Gold prices closed at $1,792/oz – up ~1%. Oil prices moved slightly higher and closed at $92.09 per barrel, up ~3.5% on the week.

Inflation was reported at 8.5% for the previous 12 months through July. The consensus forecast was an 8.7% CPI increase and investors took this to be a good sign that perhaps the Fed would be less aggressive in their planned rate hikes. Nevertheless, that still presents quite a gap to the 2% target rate and Fed interest rate tightening through year end is still the strong consensus. Consumer sentiment (University of Michigan sentiment index) reversed course and rose to 55.1 from 51.5. this was also a surprise and was likely due to lower oil and gas prices and strong job growth.

This week includes several economic reports related to housing, manufacturing levels, and retail sales. The index of leading economic indicators and the minutes from the last Fed meeting are also released this week. In addition, several Fed committee members have speaking engagements and along with the minutes will likely provide more texture to the Fed’s committee’s sentiment and outlook.

Investors will parse this week’s data and the weeks’ to follow and we shall soon see whether this rally is the beginning of another bull phase in the equity markets or just an extended bear market rally. With the move made since June, we are already pushing earnings multiples to bullish levels in the face of slowing growth. On a technical basis, this rally is at an inflection point. If it continues higher and then reverses, it will break from the norm. If it were to reverse from current levels and retest the lows, it would be quite normal, though it would go down as more substantial than the normal bear market rally.

The heat wave is over, and the school busses are coming – soak up all the summer you can!

“The real glory is being knocked to your knees and then coming back. That’s real glory. That’s the essence of it.” – Vince Lombardi