Our Top Market Takeaways for August 5, 2022
Market Update: Recession obsession
Google Trends suggests that this summer, people are searching for “recession” more often than they did even during the spring of 2020 and the Global Financial Crisis. The Treasury market seems to be reflecting recession fears. Despite a rise in yields this week, the yield curve remains inverted with the 2-year yield roughly 40bps higher than the 10-year yield.
The stock market doesn’t seem too fussed, though. Through Thursday, the S&P 500 was continuing its rally and is now about +13% higher than its June 16 bear market low. Tech-y index stalwarts like Apple, Amazon, and Microsoft have led the pack, helping the NASDAQ-100 finish Thursday at its highest level since early May.
As we mused in last week’s note, the simultaneous recession obsession and risk asset rally may seem like a head scratcher at first…but this week wasn’t without new reasons to be more hopeful about the path ahead.
Freddie Mac’s survey of home lenders showed that national average 30-year mortgage rates fell to 4.99%, down -31bps versus last week and -82bps versus the high at the end of June. Barrels of WTI crude oil are back below $90 for the first time since the invasion of Ukraine, helping coax the national average cost at the gasoline pump down to about $4.14/gallon versus over $5/gallon in mid-June. The labor market remains remarkably resilient, with Friday’s employment data showing that the economy added 528k jobs in July – more than double the number expected.
On the other hand, the strong jobs report also showed a pickup in wage growth on the month (to 0.5%, up from 0.4% in June), reminding investors that some inflationary pressures remain stubbornly strong. To boot, we still expect more signs of a broadening economic slowdown from here.
That said, maybe we’re at the point where investors en masse have accepted inflation and growth risks and are starting to look beyond the slump. Or, maybe the recent rally is nothing more than a FOMO-fueled false start.
Spotlight: Bear market rally or bottom?
While the +13% midsummer stock market rally from the lows has been a welcome reprieve, we caution investors not to let their guards down. The definition of a “bear market rally” is nebulous, but for comparison to today’s price action, we’ve decided historical instances should meet all of the following criteria:
- Must follow a drawdown of at least 20% from the market’s previous all-time high.
- Must be a gain of 10% or more from the bear market’s prior low.
- Must be followed by another decline that represents a new low for the selloff (i.e., not be the first leg in the market’s recovery back to all-time highs).
According to those parameters, we found that five of the six major selloffs since the ‘70s had at least one relief rally of more than 10% before dropping again to make fresh lows (2020’s lightning-quick selloff was the exception). The Global Financial Crisis and Tech Bubble each had three; the late ‘80s bear market – which was not accompanied by a recession – had one.