July Economic Update

Market Summary

The major U.S. stock indices moved lower last month as slowing economic indicators raised concerns about a recession and inflation remained persistent. The Dow Jones Industrial Average lost -6.71%, the S&P 500 Index fell -8.39%, and the Nasdaq Composite contracted -8.71%. (1)

Economic Data

After a descent in the first half of June due to an uncertain economic outlook, the stock market was further rattled by the May inflation report which showed an 8.6% increase year-over-year in the Consumer Price Index (CPI). Increases in energy prices topped the list rising 34.6%, in addition to food prices elevating 10.1%, all of which culminated to last month’s CPI report printing the highest increase since December 1981. (2)

The unwelcomed CPI number raised concerns that the Federal Reserve will remain aggressive with interest rate increases, which in turn, would further slow economic growth, increasing the prospect of a recession. The Federal Reserve acted swiftly on the data by raising short-term rates by 0.75% in June - the highest single rate hike since 1994. Fed Chairman Jerome Powell stated another 0.75% increase may occur in July if inflation metrics remain persistently elevated. With the current short-term rate target at 1.50%-1.75%, all Federal Reserve members stated they expected rates to almost double by year-end to at least 3%, with half anticipating a rise to 3.375%. (3)

Corporate Earnings Approaches

Earnings season begins in early July, providing investors with key insights into the health of American consumers. Companies will also communicate how they are navigating an increasingly challenging economic landscape. Each quarter, the degree to which the stock market responds to corporate earnings varies. But as investors grapple with a cloudy outlook, earnings reports over the next four to six weeks may serve as an important barometer for measuring the nation’s economic health and evaluating stock prices. (4)

Since the start of 2022, stocks have become less expensive on the basis of their price-to-earnings (P/E) ratios. When the stock market hit an all-time high on January 3, 2022, the forward P/E ratio for the S&P 500 was 21.4. By the end of last month, the average forward P/E was 15.9, which now sits below the 25-year average of 16.5. As such, while many analysts are anticipating this quarter’s earnings reports to be less than optimistic, several fundamental metrics such as the P/E ratio are beginning to swing the pendulum towards a move favorable risk/reward proposition for investors to buy companies at more reasonable valuations. (4,5)

Looking Ahead…

Gross Domestic Product (GDP) for the second quarter of this year will be reported later this month. After a contraction to GDP in the first quarter of 2022, another negative print would officially place the U.S. into a recession which is defined by two consecutive quarters of GDP contraction. While this may sound ominous looking forward, it is actually a “hindsight” indicator since the recession technically would have begun back in January of this year and is only now being confirmed. Historically, by the time a recession is declared, the majority of the declines in the stock market typically have already occurred. Often times, the market begins a bottoming process thereafter in anticipation for the next economic recovery cycle.

No single metric such as P/E ratios or GDP can accurately predict exactly when the market will make the turn higher. It is important for investors and asset managers to keep an open mind and identify value when companies are underpriced. Headwinds are present at this juncture, and we do anticipate more volatility through the summer due to the pressures being exerted by the Federal Reserve and inflationary forces. However, from a risk/reward standpoint, the odds are beginning to show some signs that we are closer to a bottom versus more substantial downside.

As always, we will continue to monitor all economic, monetary, and fiscal developments to manage risk, while also seeking investment opportunities at reasonable valuations as they present themselves.

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Monthly Financial Tip:

A good will should propose at least a few executors, as there is always the possibility that your first choice for executor might not outlive you.

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Citations:

1 WSJ.com, June 30, 2022

2. CNBC.com, June 10, 2022

3. WSJ.com, June 15, 2022

4. Insight.Factset.com, May 16, 2022

5. am.JPMorgan.com, June 30, 2022

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.