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Shift from inflation to growth fears has driven equity market rebound

August 01, 2022
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  • Equity markets finished July on a strong note, with the S&P 500® Index recording the first back-to-back weekly gains in four months. July finished with a 9% gain, the best result since November of 2020 and the best July result since 1939. After touching a year-to-date loss of 23% in mid-June, the Index has rallied nearly 13% to bring the total for the year to -13%. There has been little positive news to drive the rally, rather an acknowledgment that the pendulum had swung too violently from optimism at the beginning of the year to pessimism in June.
  • The recovery in the equity market has again triggered a buy-the-dip reaction, with equity funds and ETFs showing their first inflows in six weeks. Domestic equity funds attracted $9.5 billion in the most recent week, offset by outflows in Europe for the 24th consecutive week. Fixed income has also seen a shift in flows, with high yield showing its best inflow in nearly two years, offset by outflows in TIPS. Interest rates have dropped dramatically on growing growth fears, with the 10-year Treasury yield falling to 2.64% on Friday from 3.5% in mid-June. The yield curve remains inverted, with the 10-year 0.23% below the 2-year yield.
  • A shift in investor focus from inflation to growth fear has unexpectedly driven equity markets higher, though negative earnings revisions and deteriorating economic data suggest continued volatility is ahead.


  • Earnings news continues to come in better than feared, helping the market rally. Themes from the quarter include a consumer still willing to spend given the strong job market, but the share of spending shifting due to inflation pressure. Nearly three-quarters have reported a positive EPS surprise and two-thirds have beaten revenue estimates per Factset, with a blended growth rate tracking for 6%. The level of beats in the second quarter has been more than offset by negative revisions to the third and fourth quarters, bringing the full year estimate down nearly 2% since the beginning of the quarter. Estimates for 2023 have fallen by nearly 3% since May.
  • Economic data continue to deteriorate, with second quarter GDP declining 0.9% for the second straight quarter. Since World War II, each time there were two consecutive declines in real GDP there was a recession, the White House was quick to remind us that this is not the official definition of a recession. The National Bureau of Economic Research (NBER) makes that determination based on “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The FOMC voted on the second consecutive 0.75% hike to Fed Funds last week, bringing the upper limit to 2.5% (equaling the highest level since 2008), though Chair Powell noted there will be a point when the Fed slows hikes to assess the impact. The Fed Futures curve has three more 0.25% hikes through next February before reversing course and cutting by the Spring.
  • Senate Democrats have a renewed push for a climate change bill, with Senator Manchin and Majority Leader Schumer coming to an agreement. This bill (labeled the Inflation Reduction Act) includes clean energy tax credits and an extension of health insurance subsidies, paid for with limits on drug pricing, a 15% corporate minimum tax, greater IRS enforcement, and changes to capital gains tax treatment for carried interest. Senator Sinema remains the key to the passage, with most expecting her to jump on board.

What to Watch

  • The job market will be in focus this week, with the JOLTS job openings report on Tuesday and the monthly payroll report on Friday. Other notable data include PMI manufacturing on Monday and PMI services on Wednesday, durable goods on Wednesday, and consumer credit on Friday.


  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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