Is July the Saving Grace for Stocks?

Introduction

It is without doubt that the first six months of the year were among the hardest we have faced in recent times. Tensions between Ukraine and Russia have resulted in soaring fuel prices, reaching 191.53p per litre in the UK for petrol in early July. Inflation has been a constant cause for concern for both consumers and central banks, with the Eurozone reaching a record high of 8.9 per cent inflation by July. The US economy has shrunk for the second consecutive quarter, falling 0.9%, placing the country in a technical recession and further adding fuel to the fire.

This data paints a small picture of the events occurring over the last six months. As we approached the summer months, the sentiment across global markets was overwhelmingly negative, however the month of July has been met with open arms as stock prices rebounded and market conditions improved. The question remains as to whether this is the bottom or just a mere bear market rally and we will see lower lows.

The Month of July

Despite the first half of the year being particularly hard for stocks, the month of July has provided a much-needed boost in morale. Stocks are currently enjoying their best month of the year. Recent Tech earnings reports from giants Apple Inc and Amazon.com Inc showed resilience during tough times with both companies beating out expectations. Amazon pumped a sense of optimism into global markets, recording revenues of $121.23 billion compared to the $119.09 billion expected figure. It is no surprise that Amazon shares climbed more than 13 per cent in extended trading following the report. The S&P 500 has also enjoyed a very successful month so far, boasting a 9.1 per cent increase in share price in the month of July, its biggest monthly gain since November 2020. The growth of the index comes as nearly 49 per cent of S&P 500 companies have reported earnings and of those, 71.14 per cent have beaten estimates prompting influxes in investment. Following in the S&P’s footsteps, the tech-heavy Nasdaq index has fared even better, boasting a monthly gain of 12.3% as tech earnings have helped the index post its best monthly gain since April 2020. The strong performance over the month of July is a stark contrast to the first six months of the year, where the S&P and Nasdaq fell 21 and 29 per cent respectively, the worst first-half performance for the US equity market in more than 50 years!

The market rally was also impacted by the latest Federal Reserve meeting on the 27th of July. The chairman of the American Federal Reserve, Jerome Powell, made a remark at the conference that interest rates have reached a “neutral level” after the recent announcement of a 75-basis point interest rate increase. The dovish nature of this statement fuelled mass speculation, immediately causing stocks to rally further. Optimism spilled into the markets, causing investor sentiment to drastically improve. The main indexes ended the session 1.4 to 4.1 per cent higher, whereas bond yields took a noticeable hit.

What Does the Future Hold?

Recession fears and stock prices seemed to have somewhat of an inverse correlation over the past week or so. This has left investors in a difficult position asking the question, is this really the bottom? Callie Cox, an analyst at eToro, hinted at the fact that a recession has already been priced into the market and stocks are starting to move on and focus on from recovering from a recession that hasn’t been officially declared.

However, the overwhelming market sentiment is that we are yet to see the bottom and we are experiencing a bear-market rally. A bear-market rally is a sensation characterized by a quick and noticeable rise in stocks, typically instigated by short sellers covering bets and value investors swooping up the worst performing stocks as they assume the worst is over. These rallies tend to be short-lived, and often leave investors worse off. Arguments in favour of falling stock prices point to the consumer price index running rampant at 9.1 per cent. According to research firm Strategas it would take eight consecutive months of 0% month-on-month inflation to bring CPI down to 5%, which is the level at which wage growth is pacing. At the current rate, consumers are losing ground to inflation, and therefore further pressure will likely be placed on stock prices as disposable income decreases and the volume of capital in the market follows suit.

To summarise, the first half of the year was a tough obstacle to navigate. Tensions regarding the war in Ukraine, inflation running rampant and global GDP on the decline are just a few of the hurdles we have encountered on the way, leading to stocks performing extremely poorly. The month of July provided a map to seemingly navigate the path ahead, with positive tech earnings and optimistic responses by Jerome Powell with regards to interest rates being some of the catalysts leading a mass market rebound. Many investors and analysts point out that the destination of the map is unknown. The overwhelming market sentiment is that we are far from the bottom, and we are merely observing a short run rebound before things get ugly again. I share this opinion, believing that inflation is too strong of a force to be tamed quickly. Consumer prices are rising faster than wages, and the cost-of-living crisis being overserved in the UK hints at the fact that investor liquidity is decreasing. I share the view that we are yet to see the bottom, and investors should prepare accordingly and pay close attention to inflation and labour-market data in order to correctly navigate the treacherous path ahead.