Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 4.3% this week and was up 9.1% for the month of July. The Bloomberg U.S. Aggregate Bond Market index was up 2.5% as interest rates fell.
  • The preliminary second quarter GDP report from the BEA this week showed a second consecutive negative quarterly reading, sparking great debate over the definition of “recession”
  • Stocks ended the week higher, however, as corporate earnings reports showed no signs yet of an earnings recession.

This week was massive for macroeconomic news. The Federal Reserve raised its target interest rate, Congress passed a spending bill, and the Bureau of Economic Analysis (BEA) ignited a raging debate on the definition of “recession”. Some claim that the second quarter’s negative GDP print from the BEA was proof that the U.S. economy is in a recession. It was the second consecutive negative GDP report, although these reports will be revised in the future as more complete data becomes available to the Bureau’s statisticians.

Recessions are painful. Unemployment rises, businesses fail, and stock markets swoon.

Whether or not the U.S. is in a recession comes down to semantics. The labor market is not flashing a recession warning: employment climbed by 1.1 million jobs in the second quarter, a sharp contrast with the average loss of 240,000 in the first three months of past recessions. Household spending is up, and business investment is up from a year earlier.

Does the stock market care if the U.S. had two consecutive quarters of negative growth? It does not. Stocks are not tied to quarterly GDP growth rates. Over time, stocks are driven by future corporate profits and the interest rate, or “discount rate”, applied to assign those future profits a present value.

While it was a big week for macroeconomic data releases, it was also an important week for corporate profits as most big technology and energy names in the U.S. announced second quarter earnings. Those reports, from Amazon and Apple to Chevron and Exxon, ranged from good to excellent. Howard Silverblatt, the S&P Dow Jones Indices Senior Index Analyst, noted that with over a third of companies reporting that 71% of companies beat on sales expectations and 75% beat on earnings. Given the negativity priced into a few of those names, it did not take much to clear the low bar of expectations for a quick, decent market rally.

“Cyclical” names, such as those in the leisure and hospitality sector, continue to see strong earnings beats and forward guidance raises. Hilton reported second quarter earnings per share (EPS) of $1.29 versus analyst expectations of $1.05 and raised its full year projected EPS by 11%. No evidence of recession in the hospitality sector.

The primary risk for markets over the second half of 2022 remains the Federal Reserve’s response to quell inflation. The Fed raised its target rate by another 0.75% this week. Its next rate decision is in September, and the Fed has not provided much forward guidance on what it is thinking at this point. Futures prices show market expectations for a 0.25% hike at the September meeting.

There is evidence to support the view of slowing headline inflation and thus a downshifting in interest rate hikes. The Fed is aiming for a “soft landing” in its efforts to bring down inflation. As the last year has shown, though, inflation is unpredictable. Until it sees meaningful reductions in monthly CPI, the Fed will likely talk tough and continue with outsized rate hikes.

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