Hope you are all doing well. Stocks rose last week, adding to a run that put the S&P 500 up 9% over the last month. The major U.S. stock indexes rebounded from the previous week’s modest declines posting gains of around 2.0% to 3.0%. I don’t believe we are out of the woods just yet as this is probably another bear market rally. The S&P 500 rose 7.1% in late May and 11.1% in March of this year, and both times the rally fizzled out. Comic Con was this week in San Diego, and they did a tribute to honor the 100th birthday of Peanuts creator, Charles Schultz. I have broken down this week’s update using quotes from his iconic characters.
The market rally could be derailed by the upcoming read on second-quarter GDP report. If GDP is negative, then we will officially be in a recession. A negative number is not guaranteed, and if we get it then I feel the recession will really be in name only. The reason is that corporate earnings remain strong, unemployment low, commodity prices are finally dropping and there are no signs of weakness in consumer spending. The risk of a legitimate contraction in the future has risen. The yield curve is still inverted, and inflation may be starting to really impact businesses. U.S. business output recorded the sharpest pullback since the early months of the pandemic, dropping to a reading of 47.5 from 52.3 in June, though commodity prices likely peaked in June so next month’s reading will be more telling.
With the dollar at parity with the euro for the first time in 20 years, the European Central Bank (ECB) surprised economists by deciding to raise interest rates by a half-percentage point. The move was more than expected as the ECB hadn’t raised rates in 11 years. The central bank seeks to fight spiking inflation across Europe. Another reason for optimism that inflation might have seen its peak in Europe is the resumption of exports from Ukraine. Ukraine and Russia signed a UN-supported deal last week that will allow Ukrainian grain exports to resume through the Black Sea. It should hopefully increase the global food supply, as Ukraine is one of the world’s largest agricultural exporters.