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Market Strategy 8/01/2022

  • John Stoltzfus
  • August 1, 2022

Not Your Usual Fed Funds Hike Cycle

This time may indeed be different and that might not be a bad a thing

Key Takeaways

  • Q2 earnings season remains at center stage as 156 companies report results this week. Thus far 73% of firms that have reported have surprised to the upside.
  • Markets may test the substantial rally that occurred last week as they consider the progress the Federal Reserve has made thus far to stem the course of inflation.
  • We take another look under the hood at the S&P 500’s recent rally to determine whether recent sector performance is giving us an indication of where the broader market wants to go.
  • Recent economic data continued to show slowing in the US economy adding to the case that the economy is slowing enough to alleviate pressure on the Fed over the medium term making the current hike cycle less onerous than some expect. 
financials graphic

It should not be surprising that the recovery process from the COVID-19 pandemic is marching to the beat of a different drummer when it comes to determining whether or not we are in recession, entering a recession or simply navigating our way out of a most unusual period into a “next new normal” with no small degree of uncertainty to contend with.

For starters this Fed funds hike cycle is unusual in that it is in response to inflation at 40-year highs caused at the root by pandemic-related shutdowns of huge segments of the US and global economies, unprecedented levels of stimulus by politicians and outsized accommodation by the Federal Reserve to counter the threats the pandemic presented to populations and economies around the world now in varied states of economic re-openings.

Perhaps the current Fed funds hike cycle will mimic in some way (if not in brevity) the two-month recession that haunted the pandemic recovery process in 2020.

The process of getting through this leg of it aggravated by demographic shifts in home ownership including normal generational population and housing demand-related shifts by Boomers and Millennials as well as demand for housing by tax refugees moving from high tax states to a handful of states that have less onerous tax regimes.

Quotation from Aenean Pretium

The market in its role as a discount mechanism of the shape of things to come may just be signaling of late that better times could lie ahead.

Beyond that there are the geopolitical and economic problems wrought by China’s zero tolerance to COVID19 (and its variants) resulting in the aggravation of the global supply chain and disruption to re-openings as a few thousand cases have been known to shutter a city of as many as 25 million people. Russia’s incursion into Ukraine has disrupted the flow of natural gas and other fuels to Europe as well as strategic materials to the US and other countries further complicating the process of navigating out of this mess.

An economy jacked up by outsized monetary accommodation, supersized fiscal stimulus and demographic shifts mixed in with geopolitics resulted in overvaluation within a broad array of asset classes including buyers’ panic in housing, commodities, speculation in cyber currencies, meme stock trading as well as hiring panic by many business that overprojected the future on what might have been nearterm trends that dramatically drove revenues and profits at the height of the pandemic.

With the Federal Reserve Board having pivoted from its policy of emergency accommodation last quarter, an end to “stymie” checks funded by politicos last September and with the economy now showing some slowing midst resilience a mélange of factors on the landscape just might keep the Fed from having to get too aggressive in its quest to stem inflation.

The market adjusts

The market in its role as a discount mechanism of the shape of things to come may just be signaling of late that better times could lie ahead.

If overstimulation of the economy brought about a period of “free money” (never a good thing in our view as it fosters over-investment at best and speculation at its worst) —an end to free money could signal better times ahead as buying panic in real estate subsides, hiring panic tempers as employers consider the longevity of the trend they’re betting on when considering launching a hiring campaign and investors broadly begin to consider once again the importance of fundamentals over the actionable idea of the day the “next new thing” just might be better times ahead.

Perhaps the stock market wasn’t just oversold and practically demanding a “bear market rally” but maybe, just maybe, “the times are a changin’” and changing for the better if ever slower and with greater complexity than we might desire.

Look for traders and investors to remain focused on the results of Q2 S&P 500 earnings season this week. Though results thus far have been somewhat mixed on a day to day basis they’ve overall been better than many expected. With a little over 55% of the S&P 500’s companies having reported as of last Friday results for the second quarter have been stronger than expected. Overall earnings growth is up 6% from a year ago on revenue growth of 13.8%.

Though it’s still early to tell the outcome over the course of the next few months, “the news from the front” this reporting season in our view helped support and justify the stock market’s latest rally.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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