Capital Market Review - August 18, 2022

Some might find it surprising that the S&P 500 Index is up 17% since its June 16th low through last Friday. Mixed economic signals lead investors to question whether we are amid a bear market rally or if this is the start of a new bull market. Many market participants continue to think a recession is the only way out of this high inflation regime, which would signal that stocks are more than likely in a bear market rally. Although, belief in the Federal Reserve delivering a soft landing (raising rates enough to curb inflation but not send the economy into a recession) has increased, albeit still at a very low confidence level.

The Fed does not have a strong track record of delivering soft landings; typically, the institution is blamed for causing recessions. However, previous successful soft landings have one common trend with the current environment: a strong labor market. It is difficult to enter a recession when companies are hiring. Some commentators have focused on the weekly jobless claims increase as a sign that the labor market may be weakening.

While claims have been rising from levels we witnessed this past spring, it is important to remember these were all-time lows for weekly jobless claims.

Maintaining all-time low claims is highly unlikely, even in the best environments. This is not to say the labor market will stay strong and fend off a recession, but currently, it remains on the Fed’s side in the battle for a soft landing.

A strong labor market is needed to achieve the Fed’s goals, but the most critical aspect remains reigning in inflation. July’s consumer price index was a welcomed sign for markets when it was reported lower than June and lower than economists’ expectations. However, prices are still 8.5% higher than last year. Also, remember when markets believed inflation peaked in March, only to have higher inflation prints until July? While this report was a promising sign, one data point does not indicate a trend. Even if a lower trend has commenced, it will take much more time for consumers to feel the relief of lower prices.

As we have been saying, even the best economists have no idea if this inflationary cycle will end with a soft landing or recession. Was June 16th the S&P 500 Index’s low for this bear market? Again, no one will know until the future. If this is the start of a new bull market, portfolios will benefit from compounding returns. If this is a bear market rally, portfolios will have a higher base going into the next volatile period. Either way, portfolio allocations are built to stay invested during volatile periods like we are experiencing now while still maintaining the ability to meet long-term goals.

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Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | August 2022

The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.