- July 26, 2022
-- Don't look now, but we have a nice little market rally on our hands. Stocks rose last week, adding to a run that put the S&P 500 up 9% over the last month1
. Equities are still down roughly 17% for the year, but in a bear market, let's not look a gift horse in the mouth1
While this is an encouraging sign, we don't think the coast is completely clear. With stock and bond market declines already pricing in a lot of bad news, we think investors can be opportunistic but should expect more bumps along the way.Healthy rallies often occur within bear markets
- U.S. equities have rallied solidly off the June lows. This is not, however, the first such burst of strength in this downturn. The S&P 500 rose 7.1% in late May and 11.1% in March1. The current rally has coincided with a meaningful pullback in longer-term interest rates, with the 10-year yield falling from 3.5% to 2.8% during this period1.
- Prior bear markets have featured noteworthy rallies. While they didn't mark the end of the broader pullback, they did provide a sound reason to remain invested and a compelling opportunity for opportunistic rebalancing. In the past, rallies occurring toward the end of bear markets also saw a meaningful drop in 10-year yields and marked the middle of the recessionary period.
The upcoming second-quarter GDP report will provide the latest read on the state of the economy, and while a recession is not assured at this stage, we think the risk of a mild contraction has risen appreciably. In any event, this most recent rally suggests to us the bear market is maturing and an appetite for risk may be slowly returning, as a faint light at the end of the Federal Reserve's tightening tunnel begins to emerge.
This rally has fuel but not a full tank
Source: 1. S&P 500 Index price return, 6/17/2022–7/22/2022.
- We believe the current rally has been supported by several catalysts: signs of peaking inflation, relief from rising yields and, most recently, corporate earnings announcements.
- Commodity prices have fallen sharply in recent weeks, which will provide much-needed relief on the inflation front. Oil prices are down 20% from their recent peak, and copper and lumber prices have fallen 32% and 60%, respectively1. Agricultural commodities such as wheat, corn and soybeans are also down materially. Ukraine and Russia signed a UN-supported deal last week that will allow Ukrainian grain exports to resume through the Black Sea. This can potentially boost global food supply, given Ukraine is one of the world's largest agricultural exporters.