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Has the next bull market begun?



Stocks climbed higher last week as several key inflation reports showed evidence that price pressures moderated in July, lending further support to the peak inflation narrative that has helped lift stock prices off their mid-June lows. 

The S&P 500 Index rose +3.3% on the week, putting in its fourth consecutive week of gains and its longest winning streak since November. The NASDAQ Composite gained +3.1%, finishing the week +23.5% above its mid-June low. With the Composite now higher by over +20% from its bear market low, the tech-heavy index has technically begun a new bull market (more on that in a moment). The Dow Jones Industrials Average finished the week higher by +2.9%, and the Russell 2000 Index surged +4.9%. Like the NASDAQ, the Russell 2000 is now up over +22.0% from its bear market low, with investors gravitating back to small-cap stocks as of late, particularly as views on the potential for a deeper U.S. recession fade.

Notably, the summer rally across the major U.S. stock averages has substantially pared year-to-date losses, supporting the view that during periods of sharp declines, investors may be best served by staying the course and adhering to their well-constructed investment strategy. The Dow is down around 7.0% this year, while the S&P 500 and Russell 2000 are each down roughly 10.0% in 2022. For both the S&P 500 and Russell 2000, year-to-date losses have been more than halved since mid-June. Even in the NASDAQ, where selling pressure this year has been most acute, year-to-date losses have been pared to roughly 16.6% from down nearly 32.0% in mid-June.

However, bear market rallies can be powerful and sometimes mislead investors into assuming a more established downtrend has changed course. For example, the NASDAQ rallied +20.0% or more four times between May 2000 and October 2001, only to see those rallies fade, with the Index posting negative returns over the next six and 12 months. Only on the fifth rally of +20.0% or more between October and November 2002 did the NASDAQ finally break out of its longer-term downtrend and rally higher over the next year. Before the more permanent NASDAQ bounce at the end of 2002, the index went through a series of cyclical bull markets in 2000 and 2001 while in the middle of a secular downdraft.

Bottom line: The current rally in the NASDAQ is not out of the ordinary based on history. In periods where such rallies are accompanied by a resolution to the condition that brought stocks down in the previous bear market (or investors believe one is forthcoming), the new bull market tends to be more sustainable, with returns that are usually stronger than average over the next year. Conversely, in periods where the condition is ongoing, such as during the dot-com bust and 9/11, rallies tend to be more cyclical and susceptible to fading. In our view, investors will likely have to wait and see where the current high inflation and pandemic normalization environment fits within this new NASDAQ bull market.

Importantly, without a meaningful and more consistent shift lower in inflation, which would likely lead to the Federal Reserve slowing or pausing rate hikes, investors should view recent stock gains in the market as an opportunity to make portfolio adjustments if necessary. In our view, focusing on high-quality investments, dividends, and a proper asset allocation mix of stocks, bonds, alternatives, and cash, based on risk, remains a solid way to navigate the rest of the year, given a still uncertain macroeconomic environment.

Rounding out the week in terms of performance, Growth (+3.1%) and Value (+3.5%) were solidly higher last week, though Growth snapped a three-week winning streak over Value. All ten S&P 500 sectors finished the week higher, with Energy (+7.1%), Financials (+5.5%), and Materials (+5.1%) leading stocks higher. Consumer Staples (+1.2%) and Health Care (+1.6%) brought up the rear. U.S. Treasury performance was mixed, with the 2-year/10-year spread modestly narrowing its inversion. The U.S dollar weakened, Gold finished the week higher by +1.4%, and West Texas Intermediate (WTI) crude ended higher by +3.5%.

Last week stocks climbed higher and volatility meaningfully declined on the assumption that inflation should fade

In other items of note last week, China ended its military exercises around Taiwan but said it would continue regular patrols near the island and removed its pledge not to send troops into the island to seize control if necessary. But in response to a U.S. congressional delegation visit to Taiwan over the weekend, Beijing announced a fresh round of military maneuvers around the island. Here in the U.S., the House of Representatives passed the Inflation Reduction Act of 2022, which President Joe Biden said he would sign into law this week.

The S&P 500 has now made meaningful progress toward closing in on its 200-day moving average (i.e., longer-term trading trend) but crossed into a near-term overbought condition based on its 14-day relative strength index by the end of last week. Additionally, the Cboe Volatility Index fell to below 20 last week, its longer-term average, and notched its eighth straight week of declines. Bottom line: Stocks have climbed higher, and volatility has meaningfully declined over a number of weeks on the assumption that price pressures should fade as the rest of the year wears on. Last week’s barrage of inflation reports showed that the process may have started in July.

The headline Consumer Price Index (CPI) in July rose +8.5% year-over-year, lower than the +8.7% FactSet forecast and slower than this cycle’s highwater mark of +9.1% in June. Notably, headline CPI was flat month-over-month in July (the smallest m/m change since January 2021), coming in well below the +1.3% m/m pace recorded in June. Lower gasoline prices in July helped headline inflation moderate more than expected and could also help cool inflation pressures in August as gasoline prices continue to fall. Core CPI (ex-food and energy) rose +5.9% y/y in July, coming in below the +6.1% pace expected and matching June’s level. Month-over-month, core CPI rose just +0.3% in July, well below the +0.7% pace seen in June. 

Interestingly, the July CPI report broke a streak of ten consecutive months where headline CPI either matched or came in higher than expectations, the longest streak on record, according to Bespoke Investment Group. Of course, one month does not make a trend. But the slide lower in consumer-facing inflation last month could be the beginning of a more sustained trend in moderating price pressures. Slower growth, moderating demand, and tougher year-over-year comparisons could all act to help slow price pressures over the coming months. As a result, the odds of a 50-basis point fed funds hike in September have risen considerably versus a more aggressive 75-basis point move. 

Also, the headline Producer Price Index (PPI) in July showed prices at the wholesale level dropped 0.5% m/m, the lowest point since April 2020, driven by a 17% drop in gasoline prices. In addition, the latest Federal Reserve Bank of New York Survey of Consumer Expectations and preliminary August inflation reads from the Michigan Sentiment survey showed that while inflation expectations remain sticky, they have not yet become entrenched in consumer attitudes — a key concern for the Federal Reserve. Bottom line: Last week’s inflation reports gave the bulls new life and helped add a few data points to the idea that the economy can manage through the macro headwinds as long as price pressures continue to moderate.

In the week ahead: July retail sales, housing starts and FOMC meeting minutes

This week’s calendar will primarily focus on the consumer. Wednesday provides an update on July retail sales, which are expected to slow month-over-month, but could see a lift across some discretionary areas given lower gasoline prices. The National Association of Homebuilders Index and housing starts/permits for July are expected to point to softer home demand. July’s Federal Open Market Committee (FOMC) meeting minutes on Wednesday should be a focal point for the market as investors continue to gauge rate expectations for September. Finally, with the Q2 earnings season near complete, a batch of retailers report this week and could shed further light on inflation, economic normalization trends, and inventory headwinds already highlighted by some retailers. With roughly 92% of Q2’22 S&P 500 company reports complete, the blended earnings per share (EPS) growth rate is higher by +6.4% y/y on sales growth of +14.0%.

Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.  It is not possible to invest directly in an index.

The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.

The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.

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The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.

The Producer Price Index is a measure that examines the weighted average change in selling prices over time that are received by domestic producers or wholesalers for their output. Changes in PPI are used to predict possible changes associated with the cost of living.

The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States. It is a statistical measurement of the overall health of the economy as determined by consumer opinion. It takes into account people's feelings toward their current financial health, the health of the economy in the short-term, and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator.

New York Federal Reserve Survey of Consumer Expectations focuses primarily on expectations about economic outcomes related to inflation, the labor market, and household finance. The SCE is a nationally representative, internet-based survey of a rotating panel of about 1,300 household heads which seeks to capture changes in the expectations and behavior of the same individuals over time.

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