The S&P 500 has rallied impressively off its June 16th close of 3,666.77. It ended August 16th at 4,305.20, representing a two month gain of 17.41%. It has since backed off about four percent. This year has seen rapid moves in the S&P 500, first to the downside and then to the upside. Now the S&P 500 is at a position where both the bulls and bears can make a case why markets will go higher or lower. Arguments in favor of the bulls include the risk of a mild recession has probably been discounted, declining inflation, solid earnings, and stabilizing interest rates. The bears can counter that recession risks are elevated, and not properly discounted, declining inflation does not equal low inflation, and earnings downgrades are just starting. There are some technical indicators that suggest the bear market has ended, while others indicate that the recent improved performance is nothing more than a traditional bear market rally. The point is that there is no obvious trend. This should not surprise anyone. 2022 has been an interesting year. This is a strange economy that has witnessed robust job growth coincide with negative real GDP growth.
NPP thinks that financial markets will remain choppy over the next month and could move rapidly in either direction depending on economic data. Chair Powell is set to speak in Jackson Hole later this week. Investors are apprehensive, but it is likely the Federal Reserve will remain data dependent. This is as it should be. The Fed does not have a crystal ball that allows it to see inflation data, jobs data, etc. before it happens. Economies are hard enough to forecast in normal environments. This economy is too uncertain and still adapting to post-pandemic life to submit to normal assumptions. Flexibility in outlook and waiting for the data to act is wise. Markets often like certainty so choppiness is likely as economic and earnings reports trickle in.
September is historically the worst month of the year. There is the possibility of another move lower. However, a drawdown that does not coincide with worsening growth and inflation data will have trouble following through. Conversely, solid earnings are almost assuredly needed for equities to approach prior highs. The bulk of earnings reports will not occur until October. There will be some companies reporting in late September that might hint at the third quarter reports to follow. Additionally, companies will have the chance to give mid-quarter updates. Benign updates and a lack of warnings would be positive for equities. NPP believes that equity markets will remain choppy for the next month or two. We do not think a recession is likely in the second half of 2022, even though the risks are elevated. NPP expects the rally that started on June 16th to reassert itself in the fourth quarter. While there are numerous risks to the outlook, it should not be forgotten that there are also many things that can go right, and the long-term direction of the market is up.