Monthly Market Update
Submitted by TLWM Financial on August 1st, 2022
The second half of the year is off to a good start as the S&P 500 rallied roughly 9% in July. While this rally was welcomed by investors there is still a lot of work to be done as the S&P 500 closed the month down about 13% for the year. (YCharts)
For many investors the two most important drivers this year have been inflation and The Fed. The June CPI reading came in at 9.1%, the highest in 40 years, and the Fed responded by raising rates another 0.75%. While headline grabbing, neither of these developments were particularly surprising. Future inflation readings are likely to impact consumer sentiment and monetary policy for the rest of the year.
We discussed both of these items along with our economic dashboard during our Mid-Year Market Outlook event a couple of weeks ago. During that event we got a number of questions about the current state of the economy. We use our economic dashboard as a guide for what’s to come for the economy and market. In fact, the deterioration we saw in our dashboard earlier this year was a big reason that we adjusted portfolios to be more defensively positioned.
Last month that deterioration continued as we had two more downgrades (from green to yellow):
- Business Confidence – the trend in the ISM PMI Manufacturing Index tends to signal the direction of corporate earnings over the next 6 months. We downgraded because the ISM PMI data has been trending down this year. This indicator is not red yet, because the absolute level of the index (53) suggests continued growth.
- Yield Curve – interest rate changes over the last few weeks (a decrease in the 10YR yield, and an increase in the 3-month yield) has caused the spread to narrow to 0.26% from 1.26% at the end of June. A yield curve inversion (which happens when that spread drops below zero) has been a historically consistent predictor of a recession, although it has not been a good timing tool.
We remain defensively positioned with a portion of our growth allocation, but stand ready to make adjustments as the current environment evolves. That could mean reducing risk further if an opportunity presents itself or it could mean beginning to put some cash back to work.
As always, we are committed to communicating our outlook to you. If you have any friends, family, or colleagues that you feel would want to learn more about our view on the market and economy feel free to pass this along to them or let us know; we’d be happy to reach out.
Sincerely,
Your Team at TLWM
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