August 12, 2022 – Market and Economic Update


The past two weeks have been epic for market-watchers and those that live and breathe financial news. It started a couple weeks back with a Federal Reserve (Fed) rate hike of 75bps, then a much-anticipated gross domestic product (GDP) report, followed by the busiest week of earnings season which got most of the headlines. And this was all before the past couple days which were riddled with inflationary data which added to the evidence that inflation has peaked. There was even a surprise out of Washington D.C., with a Schumer-Manchin agreement on a climate-healthcare-tax bill. What a start to August it has been.

Stocks expressed approval of this news, securing three straight solidly positive weeks and a breath of fresh air for investors. The S&P 500 Index enjoyed its best month since November 2020 and its best July in over 80 years. Last week’s gains were encouraging, and this week’s gains turned investors heads. Let’s look at each piece of news individually.

First, the Fed hinted at slowing the pace of interest rate hikes later this year then we receive the economic data everyone has been waiting for, reliable evidence in CPI and PPI that peak inflation has been seen. Now, whether markets may have gotten a little ahead of themselves remains to be seen, but in the past six weeks, nearly 75bps has come out of the market’s expectation for the peak fed funds rate, which is the short-term rate controlled by the Fed to affect monetary policy. The inflation battle is far from over, but the market’s reaction has been encouraging, and the Fed may be poised to surprise the market with a pause by year-end.

Next, the first read on second quarter GDP revealed the U.S. economy contracted for the second straight quarter. The rule of thumb is two quarters of negative GDP defines a recession, but the official definition by the National Bureau of Economic Research is broader than that. With a strong, even if slowing job market and resilient consumer spending, we believe not enough sectors of the economy are contracting to qualify as an official recession. If a recession comes—probably a 50-50 proposition for the first half of 2023—it will likely be mild. A mild recession was probably already at least partially if not fully priced in at the June stock market lows, suggesting June 16 may mark the S&P 500’s ultimate low.

Capping off the busy week, the flurry of earnings reports demonstrated that corporate America has managed stiff headwinds effectively. Given the slowing economy, intense cost pressures, and a strong U.S. dollar clipping foreign-sourced profits, a 6% year-over-year increase in S&P 500 earnings per share during the second quarter is quite impressive. Estimates for the second half of 2022 and 2023 have come down as expected, but with expectations having gotten so low, stocks generally rallied on results even as estimate were cut.

Looking ahead, we are in August which has historically been a weaker month for stocks. We must also consider that midterm election year lows typically come around this time on the calendar for the S&P 500. These lows have historically been followed by an average gain of over 30% over the subsequent 12 months. Moreover, some of the timeliest leading indicators of inflation, such as commodity prices and various consumer and business surveys, indicate cooling to continue, even if it may be a slow process. Market-based interest rates—those not controlled by the Fed—have also come down quite a bit, which is supportive of stock valuations.

At the same time, geopolitical tensions are rising as House Speaker Nancy Pelosi visits Taiwan and the war in Ukraine continues. We watch these developments closely and look for trends or leading indicators that the landscape has changed, and I report to you our investors to provide what we believe to be the most prudent advice. We believe the recipe of low valuations, lower interest rates, projections for inflation reducing, and the possibility that the Fed signals a pause over the upcoming months tip the scales toward the bulls. The ride probably won’t be smooth, but we believe long-term investors who sticks to their financial plan, and continue to invest with discipline, won’t have to wait too long to be rewarded for their patience.

Please contact me if you have any questions. Stay safe and stay the course.

Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer

40 E Montgomery Ave, 4th Floor Ardmore, PA 19003

Office Phone: 215-982-2743
Fax Number: 215-827-5814

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Subscribe to our newsletter

Get BASH Perspectives
in Your Inbox