Market Notebook

by | Jul 24, 2022

Discussion – 

Both equity and bond prices rose last week, as measured by tickers SPY and BND, respectively.

Both equity and bond prices, as measured by tickers SPY and BND, respectively broke higher out of recent areas of price consolidation. Additionally, prices closed above the 20-day exponential moving average and 50-day moving average. From a technical perspective, such price action is bullish and keeps the door open for purchases during the coming week.

Both equity and bond market participants appeared to be trading on a similar thesis, namely, that the economy is slowing, but not too fast, and that key contributors to inflationary measures have peaked. Such participants might believe that the Federal Reserve rate increases will be fewer in total and smaller in size. If true, the stage would be set for price recovery; thus, market participants were bidding prices higher.

The next question market participants should be asking is, how will recent rate changes, an inflationary environment, and a slowing economy affect corporate profits? If the Federal Reserve gets rate changes just right and corporations manage to maintain healthy margins, the proverbial “soft landing” for the economy is possible. If those factors fail to align, then a reversal in equity and bond prices is possible.

Among those calling for recession is The Conference Board, whose Leading Economic Index suggests something other than a “soft landing.” From their press release dated June 21st, “A US recession around the end of this year and early next is now likely.”

As mentioned previously, growth and tech stocks are further along in the cycle compared to the S&P 500 as measured against bear market statistics for the NASDAQ and S&P 500. It thus seems likely that tech and growth will lead during a general recovery. Shifting gears and looking at value, it appears that small caps are disproportionately discounted compared to several other categories of equities.

In the coming week, bullish technicals and improving sentiment keep the door open for equity and bond purchases. Remember that asset class shifts can allow market participants to take advantage of specific opportunities even in fully invested portfolios.

All the best in the week ahead!

Disclaimer: Nothing in this discussion should be considered investment advice. The content of this discussion is strictly my personal opinion and subject to change at a moment’s notice. Investment advice can only be provided to you by your investment professional and not by a general market discussion such as this one. If you wish to speak with an investment advisor, contact us. We can probably help.