Market Musings 8/3/2022

Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!

Strong July rebound as markets rally on peaking inflation sentiment. The next bull market or just overly optimistic?

Markets rebounded from June’s -8% dip into bear market territory brushing aside new CPI inflation peak breaching 9% and another 75 bps Fed rate hike. Investors choose to focus instead on strong earnings alleviating #ConsumerNoConfidence concerns and peaking #InflationFears sentiment. S&P 500 rose +9% in July as investors look optimistically to start another bull market cycle.

Other than sentiment, nothing really improved in July on the #InflationFears front. Monthly CPI data showed inflation reaccelerating to new 9.1% peak in June vs. May’s 8.6%. As expected, Fed continues to stress primary goal is to reduce #InflationFears and hiked #RisingYields rates another 75 bps (though some initial market concern for 100 bps hike…). Growing optimistic market sentiment that inflation is peaking; so Fed can slow and eventually lower rate hikes; so the next bull market can start. We think the market is getting ahead of itself again and still expect #InflationFears and #RisingYields to linger through the end of 2022.

Q2 earnings season was a mixed bag. On one hand, we saw consumer spending strength for the most part dominate across sectors offsetting much of the #ConsumerNoConfidence sentiment that tanked June. However, corporate spending continues to tighten their belts from consumer marketing dollars to reassessing IT spending plans. While the near-term consumer spending strength is comforting, we are still cautious given corporate cost cutting measures especially reduced marketing investment that drives consumer sales.

We think the market is overly optimistic that inflation quickly decelerates allowing the Fed to refocus on preventing a recession by quickly halting the rate hikes and begin lowering rates by early next year. We don’t expect inflation to significantly decelerate through the end of 2022. In addition, given the Fed’s “transient” miscalculation last year, we would expect a slower deceleration from its aggressive #RisingYields plans to ensure inflation is tamed. Overall, we’re fairly bearish on the July rally as we believe the market has already priced in the best case scenario.

We continues to stay on defense. In July, we shifted a Communications portfolio allocation to more #RecessionResilient Healthcare for all portfolios. Portfolios continue to be tilted towards #Flight2Safety and #RecessionResilient names to combat trending #InflationFears and #RisingYields. We continues to view any market pullbacks as great opportunities to add to portfolios if you have a long-term horizon to ride out the volatility.

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The statements, opinions and analyses presented here are provided as general information. This article is the opinion of the author. Anything within this article should NOT be considered an investment recommendation or advice. See Ursa’s full disclosures here.

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