Week of July 25, 2022

Despite a sell-off last Friday on the back of weaker-than-expected earnings from Snap that sent the technology sector tumbling, the U.S. equity markets finished the week with solid gains.  The Dow and S&P 500 gained 2% and 2.6%, respectively, while the NASDAQ increased 3.3%.

The Federal Reserve is set to meet this week and is expected to announce on Wednesday a 0.75% increase in short-term interest rates.  This will bring the Federal Funds rate in the range of 2.25% - 2.5%.  This comes on the heels of a 0.75% rate increase in June, the largest increase since the mid-1990s.  This is all in an effort to curb 41-year high inflation which came in at an annual rate of 9.1% last month.

Investors will get 2nd quarter gross domestic product (GDP) on Thursday, showing if the U.S. economy is in a technical recession (defined as two consecutive calendar quarters with negative GDP).  1st quarter 2022 GDP was revised twice, settling in at -1.6%.  While analysts’ expectations for 2nd quarter GDP varies widely, the Atlanta Federal Reserve latest estimate (as of July 19) is for a decline of another 1.6%.

Even with a somewhat gloomy outlook for the U.S. economy, stocks have performed fairly well in July.  “Equities have managed to stage a rally MTD (month to date) and climb a wall of worry.  The bounce has been led by cyclical and growth stocks, helped by longer end yields stabilizing, which in turn eases the pressure on P/Es,” Barclay’s Emmanuel Cau wrote in a note last Friday.  “This confirms to us that the market’s focus has switched from inflation worries to growth worries, with a sense that bad news is becoming good news again,’ Cau added.