Many investors believe that the good times may be coming back after July’s gains of 10% for the Russell 2000 and 9% for the S&P 500. In the first half of the year, investors were wondering how fast and how high the Fed would raise rates, when inflation would peak, and whether the unanticipated Russia/Ukraine black swan event would come to an end. Peak uncertainty resulted in losses for both stocks and bonds.
But in July, investors’ perceptions appeared to be clear. Many predicted that the Fed would reach its terminal Fed Funds rate before the year’s end. People started pricing in a drop in commodities and oil prices in the second half of the year even while inflation in the U.S. was north of 9%. Investors even started anticipating Fed rate reductions in 2023 as evidence that things might only get better from here. In contrast to the gloomy first half of 2022, July was filled with unrestrained confidence.
Naturally, that has led a lot of investors to believe that the bear market bottom was in mid-June, and that we are now on track to reach new highs. Since then, the S&P 500 and Russell 2000 have returned 13% and 14%, respectively. Those numbers must be taken into consideration, right?
Undoubtedly, in retrospect, we might realize that mid-June was the bottom. According to history, it’s not a done deal. Far from it, in actuality. Since the tech bubble 20 years ago, there have been numerous occasions where stocks have risen by 20% or more from a bottom just to set new lows later, sometimes in a matter of weeks.
The Treasury market over the previous 40 years is a fantastic illustration of how things might go down. Although there were many brief increases in rates along the road, yields had been steadily declining up until this year.