July was a great month in markets. The Dow rose to a 6.7% gain while the S&P 500 added 9.1% for the month. The Nasdaq Composite, while still in bear market territory, is up roughly 12.4%. Those were the biggest monthly gains for all three indexes since 2020.
Are we euphoric? Well, no. Although the month was good, this comes on the heels of one of the worst quarters since 2008 and the worst first half of a year since 1970. This is sort of like a rainstorm in the middle of a drought. While we welcome the rain, we do not declare the drought over until we received consistent and significant rain.
Although optimism is brewing again that US inflation could be nearing a peak, sentiment remains subdued with risks around a potential economic retraction remaining high. A looming energy crisis in Europe has also added to the uncertainty.
This may just prove to be a bear market rally in the end — they are very common during longer bear markets — but the combination of rate reprieve, bearish sentiment and positioning, and corporate and consumer alliance in the face of inflation has been enough to spark a rally in risk assets.
In a recent investor survey of over 800 institutional investors, Bank of America reported:
- Among equity regions, investors are most bearish on Eurozone and Japan
- Investors are most bullish cash and most bearish on equities
- In the past four weeks, investors increased their exposure to bonds, staples, utilities, and healthcare, while slashing exposure to equities, Eurozone, materials, and banks
As of August 1, more than half of S&P 500 companies have reported earnings, with 72% of those names beating expectations. What we think is the market is taking a lot of comfort in the mixed earnings season because the concern was that it was not going to be mixed, that it would be more uniformly negative.