Last Week in Review July 29, 2022

August 1, 2022

Last Week In Review

Last week, stocks posted solid gains despite another outsized 75-basis-point rate hike from the Federal Reserve and news that the economy contracted at a 0.9% annual rate in the second quarter. The “bad news is good news” dynamic appeared to have taken hold, with investors seemingly penciling in a lower terminal federal funds rate after the second-quarter economic contraction. Growth stocks outperformed value stocks on weakness in the retail sector.

Early-week trading was subdued on low volumes, although a downbeat second-quarter earnings pre-announcement from Wal-Mart weighed on broad sentiment. The retail bellwether said that food inflation was cutting into consumers’ discretionary spending, causing it to lower its earnings guidance.
With 50% of the companies in the S&P 500 Index expected to report earnings during the week, investors focused on quarterly numbers from technology giants such as Amazon.com, Apple, and Google parent Alphabet. Amazon.com and Alphabet jumped on Wednesday after posting better-than-feared earnings results after the market closed on Tuesday.

US – Markets & Economy

All eyes were on the Federal Open Market Committee (FOMC) meeting, which concluded with Fed policymakers announcing a widely expected 75-basis-point rate increase last Wednesday. The FOMC statement noted some softening of spending and manufacturing, and many market participants seemed to interpret Fed Chair Jerome Powell’s post-meeting press conference as surprisingly dovish. Combined with the stronger-than-expected quarterly earnings reports from Alphabet and Amazon.com, this led to a one-day gain of over 4% for the Nasdaq Composite Index and sharp gains for other indexes.

On Thursday, the Commerce Department reported that gross domestic product (GDP) contracted by an annual rate of 0.9% in the second quarter. Consensus expectations were for an increase of 0.5%. The second-quarter GDP number marked the second consecutive quarter of contraction, one standard definition of a recession (but don’t tell the White House).

The market seized on this negative news about the economy as a sign that the Fed could slow or stop its rate hikes sooner than expected, extending the stock rally through the end of the week.

US – Equity Market Performance

Index Friday’s Close Week Ending 7/29/2022 Weekly (+/-) Point Change 7/29/2022 % Change YTD Week Ending 7/29/2022
DJIA 32,845.13  945.84 -9.61%
S&P 500 4,130.29  168.66 -13.34%
Nasdaq Composite 12,390.69 556.66  20.80%
S&P Midcap 400 2,512.73  115.97 -11.59%
Russell 2000  1,885.23  78.33 -16.04%

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

Sparked by Powell’s dovish post-FOMC meeting comments last week, the U.S. Treasury yield curve steepened, with intermediate- and short-term yields decreasing and long-maturity rates holding generally steady. Confirmation that GDP contracted over the year’s first two quarters also fueled demand for short- and intermediate-term Treasuries. (Bond prices and yields move in opposite directions.)

The broad tax-exempt municipal bond market traded higher, aided by lower Treasury yields and a constructive technical outlook ahead of August coupon payments. Municipal traders reported that demand was strongest in the intermediate-term segment of the municipal yield curve, paralleling moves in the Treasury market.

Traders also noted that heavy new issuance, predominantly in the financials and banking sectors, created a complex technical environment for investment-grade corporate bonds at the start of the week. However, investment-grade corporates began to rally after the dovish Fed press conference and as primary calendar activity slowed.

Similarly, high yield bond market sentiment improved after the Fed meeting. However, Wal-Mart’s earnings outlook weighed on the retail sector and the broader high yield market amid fears of a less healthy consumer. The loans market was somewhat mixed throughout the week as earnings season progressed and investors focused on the FOMC meeting and quarterly GDP figure.

US Treasury Markets – Current Rate and Bi-Monthly Change

3 Mth +0.03 bps to 2.32%
2-yr: -0.24 bps to 2.88%
5-yr: -0.35 bps to 2.68%
10-yr: -0.27 bps to 2.65%
30-yr: -0.07 bps to 3.01%

SOURCE: FOR THE WEEK ENDING July 22, 2022. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.

Interesting News Overseas

Last week hares in Europe gained ground, boosted by data showing that the eurozone economy expanded at a higher-than-expected rate of 0.7% in the second quarter. Markets largely shrugged off concerns about rising natural gas prices due to reduced Russian supply. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.96% higher, while Germany’s Xetra DAX Index rose 1.74%, France’s CAC 40 Index increased 3.73%, and Italy’s FTSE MIB Index returned 5.63%. The UK’s FTSE 100 Index returned 2.02%.

Core eurozone bond yields fell as concerns about global growth increased after Russia reduced its gas supplies into Europe. The International Monetary Fund (IMF) downgraded its global growth forecast while the U.S. entered a technical recession. Peripheral government bond yields broadly tracked core markets. UK gilt yields also largely followed core markets but ended the week mostly level.

An early estimate of euro area inflation came in above expectations, hitting 8.9% in July—up from the 8.6% registered in June. The rise in headline inflation was driven by food and energy prices.

European natural gas prices rose after Russia reduced gas supplies from the Nord Stream pipeline to 20% capacity, citing the need for maintenance on another turbine. European Union (EU) energy ministers agreed that member states would cut their natural gas use by 15% over the winter. Only Hungary, heavily dependent on Russian energy exports, voted against the proposal.

On the other side of the world, China’s stock markets eased after a high-level meeting of the ruling Communist Party dropped calls that it will strive to meet its 2022 growth target and gave no indication of new stimulus. The broad, capitalization-weighted Shanghai Composite Index eased 0.5%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.6%, Reuters reported.

The tech sector was weak after The Wall Street Journal reported that Jack Ma, founder of e-commerce giant Alibaba Group, was planning to cede control over Ant Group, the financial technology group spun off from Alibaba in 2011. Ant operates the world’s largest mobile payment app Alipay, which has more than 1 billion users and is indirectly controlled by Ma. On Monday, Alibaba announced plans for a primary listing in Hong Kong while keeping its U.S. listing.

This Week Ahead

This week, all eyes will be on the NFP report, which is expected to show the American economy created 250K jobs in July, the least since a decline in December of 2020, in a sign that hiring may be cooling down. The unemployment rate is estimated to be stable at 3.6%, remaining the lowest since February 2020, and wage growth is set to slow down slightly. Traders will also keep a close on appearances from several Fed officials for further hints on the size of the Fed September rate hike. Meanwhile, the earnings season continues with 148 S&P 500 companies reporting quarterly results, including Eli Lilly, Gilead Sciences, Uber, Caterpillar, and Amgen. Other significant economic data include final S&P Global PMIs, ISM Manufacturing, and Non-Manufacturing PMIs, exports, imports, Challenger job cuts, construction spending, JOLTS job openings, and factory orders.

Have a great week!

Stephen Colavito

Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC

D,M: 404.313.1382
E: stephen@perigonwealth.com

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com

Written by Stephen Colavito

Chief Investment Officer

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