The first six months of 2022 saw S&P 500 and Nasdaq move into the bear market territory after falling more than 20 per cent from their recent highs. The meltdown in stocks was understandable after the valuations had peaked on the back of the easy money policy of the Federal Reserve. The stocks started tanking once it was clear that US Fed will start raising interest rates to tame the runaway inflation. Inflation crossed 9 per cent in June and by July end, US Fed had raised rates by 225 basis points in the current interest rate cycle.
July 2022 has been the best month for S&P 500 since November 2020, with the leading index jumping 9.11 per cent amidst the economic uncertainty. The top mega cap stocks S&P 500 were Tesla, Apple, Amazon, and Nvidia, all clocking over 15 per cent in July 2022.
Nasdaq 100 was up by 11.76 per cent in July 2022 while Russell 2000 Index constituting the mid-cap stocks rose by 9.11 per cent.
The reversal in stock prices comes at a time when rate hikes are underway and the actual impact of the Fed’s monetary action may still not be visible in companies’ earnings.
The recessionary fears are still there with the US GDP falling annualized 0.9% on an annualized basis in the second quarter after a 1.6% drop in the first three months of the year.
The only silver lining that showed up was the statement from Fed that the rate hike may not be as aggressive as thought to be. Market participants feel the Fed could soon reduce the pace of tightening if the economy continues to slide further down. What may go against the traders is if the Fed had to tighten the conditions needed to tame inflation fully.
The other key factor working in favour of bulls is the corporate earnings. Nearly 3 out of 4 S&P 500 companies have reported results beating analyst estimates that are sending signals that corporations are better placed to weather the inflation and rate hike impact.
Overall, it may be a bear market rally rather than a new bull market rally that remains to be seen over the long term only. The economic challenges remain where they are and new ones may also crop up by the time next quarter’s results start flowing in. The state of the economy, corporate results, and stock market performance cannot remain uncorrelated for too long.