RICHMOND, Va. -- While economic news lately has been largely negative, inflation remains high, the economy shrank for a second quarter, Russia's invasion of Ukraine continues, and supply chain issues remain, the stock market could have its best month of the year.
Economists always point out the stock market is not the economy, so Sandy Wiggins from ACG Wealth Management in Midlothian helped explain how that is reflected in today’s numbers.
“The comparison should be from the first part of this year to the first part of 1970,” Wiggins said. “Think about how investors felt in July of 1970 because it had been a terrible start to that year, with the market down double digits. Then what happened in the second half of 1970, the market was up more than 20%. I’m not sure that will happen during the second part of 2022, but having a sound investment strategy that you can stick with is key in these times of turbulence.”
Wiggins said despite a slew of bad numbers- on Thursday the Labor Department released second quarter GDP data, showing a 0.9% decline, a second straight drop, technically meeting the definition of a recession- the stock and bond markets reacted positively.
The market rose Thursday and Wiggins said the same thing has happened since the Consumer Price Index data was released two weeks ago.
“It showed a 9.1% increase in prices over the last year, the highest we have seen in more than 40 years,” said Wiggins. “Now, inflation has been the monkey on the back of the markets all year, and I would argue it is the number one reason for the declines we’ve seen in stocks and bonds—more so than the war in Ukraine or the shutdowns in China. One would think that the June 13 CPI release would have sent stocks even lower, but in fact, what we’ve seen is the S&P 500 gain nearly 6% and the Nasdaq nearly 7% since that point.”
Even the Federal Reserve raising a key interest of .75 basis points was absorbed by investors with a shrug. “There are a couple of things driving this relationship of bad-looking economic news translating to stock market gains,” Wiggins said. “For one, the markets are forward-looking mechanisms. Investors don’t care so much about what happened in recent months but rather what expectations are going forward. There seems to be a growing expectation that we are nearing peak inflation if we didn’t already see it earlier this month. This is borne out in the data we’ve seen in recent weeks of falling prices in many different commodities. As of yesterday, the price of oil is about 19% off its recent high, corn off by almost 25% and wheat has fallen by nearly 38%. The only commodity that continues to show significant increases is natural gas, and this is driven largely by what’s happening in Ukraine and the impact of Russia’s supply of Natural Gas to Europe.”
“Another reason why stocks may be rallying in the face of bad news is that there is growing support for the notion that the Fed will stop tightening their monetary policy so aggressively soon, and some even think we may see rate cuts by next year if the Fed is in a position to respond to a recession,” said Wiggins. “Fed Chair Jerome Powell did indicate in his news conference Wednesday that the Fed may slow their pace of rate hikes in order to gauge how well what they’ve already done is battling inflation.”
But Wiggins also offers a strong cautionary note.
“Ultimately, the stock rally of recent weeks is an encouraging sign for investors but everyone at home should be careful not to assume we’re necessarily out of the woods,” Wiggins said.
“The disruptions caused by inflation, Russia and general supply shortages are still very much with us. To the extent that these threats continue to weigh on consumer spending, business investment and the other things that drive growth, markets may see continued volatility. Attempts to time the market are more likely to backfire than work out well in the long run, and that’s why we’re big advocates of investors creating a plan that they can stick with in good times and bad, a plan that allows for enough growth to meet your individual goals without taking on more risk than you should.”