Market Strategy 7/05/2022
Don’t Miss the Forest for the Trees
In transitional periods discipline and historical context can help separate the signal from the noise
Key Takeaways
- Markets remain volatile as concerns about economic growth and the potential for a recession increased on a weakening in economic data.
- Despite a short trading week a brace of economic data and the Fed’s FOMC minutes will offer plenty for investors to focus on.
- Headlines pointing to the worst H1 since 1970 for the S&P 500 move us to look under the hood of that year’s results to find a powerful rally that occurred in the second half of that year.
- Data last week on the ISM manufacturing index and consumer confidence measures both point to softer growth in Q2 than was expected.
The Independence Day holiday abridged week we are entering has enough items on the calendar to drive investors and traders to distraction. Economic data scheduled for release this week includes the ISM services index; the jobs report for June; unemployment data and average hourly earnings along with the minutes of the Federal Reserve’s June FOMC meeting.
With the first half of the year moving into the rearview mirror investors can’t help but wonder what lies ahead in a year that thus far has wrought heightened levels of uncertainty, disruption and dysfunction that has rattled asset class values across the spectrum of the good, the bad, and the ugly.
With inflation persistent and sticky at its latest 40-year high stateside, even cash positions held to diversify away from traditional investments such as stocks, bonds and commodities (as well as in highly speculative investments such as crypto currencies) have suffered loss of buying power against the price of just about anything a business or consumer might need or desire to purchase including: food (beef, poultry, pork, fish, vegetables, fruits), vehicles (cars, trucks new and used), cost of housing (purchase or to rent), clothes, fuel (oil, gas, diesel, natural gas, jet fuel); travel and leisure and a wide variety of other services to mention just a few.
The financial press as well as other publications this national holiday weekend were rife with attention grabbing lines such as “Worst first half of the year for the S&P 500 since 1970” along with no shortage of stories suggesting that a recession may not just be around the corner but possibly already here. (We’ll wait for the National Bureau of Economic Research’s call on the latter point which by the way won’t happen until the next recession has actually begun).
We couldn’t find a current article over the weekend (with the jarring headline about the S&P 500’s first half 2022 performance being the worst since H1 1970) that addressed the second half of the year 1970. So we turned to our trusty Bloomberg terminal and discovered that while the S&P 500 had dropped 24.4% from the start of the year to May 26 in 1970, the index showed considerable resilience thereafter rising some 33% from the low to the end of the year. Inclusive of the drop in the first half of the year and the rally that ensued the S&P 500 performance was essentially flat with a positive bias (up 0.1%)—not including dividends for the full year of 1970. With dividends reinvested (to produce a total return) the S&P 500 returned 3.94% in 1970 per Bloomberg data.
We note that the recession of 1969-1970 (considered to have been a relatively mild recession when recounted) took place during a period when the US government was trying to address the budget deficits of the Vietnam War while at the same time the Federal Reserve was raising interest rates.
The Fed’s target rate was at 8.98% at the start of 1970 but fell to 4.9% by the end of that year likely contributing to the decline early on and the rally later in the year in stock prices that occurred in the second half of that year.
Beyond the week ahead lies the unofficial start of Q2 earnings season which begins on July 14 when several of the big banks report revenue and earnings results for the period. A handful of companies have thus far reported suggesting that that forward guidance from managements will be a primary focus in the weeks ahead.
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