The US stock markets rallied again for the 4th straight week, with the Dow (+3.0%), NASDAQ (+3.1%) and S&P 500 (+3.3%) each gaining 3% or more. Meanwhile, taxable bonds were up about 0.3% and tax-free municipal bonds were roughly flat.
The 800-pound gorilla (inflation) remains in the room, but the stock markets seemingly choose to ignore it. Last week, two important inflation reports – the Consumer Price Index (CPI) and Producer Price Index (PPI) were reported for July. The CPI continued to remain high at 8.5%, but was lower than the 9.1% from the prior month, as energy prices came down in July. That said, core inflation (excluding food and energy) increased by 0.3% compared to June. The PPI decreased 0.5% from June, but remains at 9.8% over last year. The stock market rallied on the news, as investors believed these values could be enough to cause the Fed to slow down their interest rate hikes. However, it is often said on Wall Street that the bond market is smarter than the stock market, and the bond market revealed that there were no changes in its expectation for the Fed to raise rates during each of its next three meetings in 2022.
Meanwhile, we have nearly ended the quarterly corporate earnings season, which seems to be more reflective of my sentiment – the real data. While the S&P 500 earnings grew 6.4% over Q2 last year, 5 of the 11 sectors reported negative earnings growth. The overall stats were buoyed by the energy sector that grew by 299% year over year. Without the energy sector, S&P 500 earnings would have dropped by about 3.7%. Over the course of the earnings season, forward earnings growth expectations were lowered from 10% to 8% for 2022. In short, inflation is rearing its head with corporate profits. Plus, the strong dollar is hurting the profits of companies that do a large portion of their business overseas. Personally, I don’t understand why the markets rallied on all this news. I continue to be a non-believer, but I do like the upward trend.
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About the Author: Michael Menninger, CFP®️