Markets Rally on Weak Economic Data; Bonds Also Rise
Wow, what a week …… and what a month! Last week, the markets survived the trifecta of big economic data, as the Dow (+3.0%), NASDAQ (+4.7%) and S&P 500 (+4.3%) exhibited strong weeks. That ended the month of July with the strongest gains since November 2020. Meanwhile taxable bonds gained about 1% for the week and tax-free municipal bonds gained about 0.3%, extended their winning streak to six weeks. Investors will be pleased when they receive their July statements, as balanced portfolios gained about 2% - 5% for the month.
The trifecta of economic data last week was the Fed raising interest rates, quarterly earnings reports from about one third of the S&P 500 companies, including the five largest (all technology) companies, and the 2nd quarter GDP report. The markets responded favorably to the Fed after it raised interest rates by 0.75%, as some were concerned the Fed might raise it by as much as 1.0%. Despite slower revenue growth from Apple, Amazon, Google, and Microsoft, their earnings reports were met with favor, helping propel the markets for the week. And lastly, 2nd quarter GDP was reported as being negative, suggesting that the US is in a recession, as per the definition of two consecutive quarters of declining GDP growth.
In my opinion (also shared by others), last week’s market rally was rather surprising, because it simply didn’t make sense. While Q2 earnings weren’t as bad as feared, companies are lowering their future growth expectations. The Fed also didn’t imply it would slow its rate hikes, so why the favorable response? Lastly, whether the US is in a recession is academic and up for debate, it’s certainly not debatable that the US growth is slowing. As for the topic of recession, tune in to next week’s episode of my TV show as I am joined by Thomas Balis, CFA ®, as we dive deeper into the numbers.
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About the Author: Michael Menninger, CFP®️