Undaunted by another Fed rate hike and news of a contracting economy, the stock market rallied last week on better-than-expected corporate earnings.
The Standard & Poor’s 500 picked up 4.26%, while the Dow Jones Industrial Average increased 2.97%. The Nasdaq Composite index gained 4.70% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose 0.95%.1,2,3
Stocks Rally on Earnings
It was an inauspicious start to the week after a big-box retailer missed earnings and reduced forward guidance on Tuesday, sparking a broad market retreat.
But sentiment improved following mega-cap technology company earnings that proved better than expected. Enthusiasm gathered steam in the wake of the Fed’s 0.75% rate hike, boosted by Fed Chair Powell’s comments following Wednesday’s Federal Open Market Committee meeting. Powell indicated that it might become appropriate to slow the pace of future hikes, and he didn’t believe the economy had entered into recession. Stocks on Thursday shrugged off news of a second-consecutive quarter of negative economic growth to build on Wednesday’s gains as fresh earnings continued to comfort, if not impress, investors.4
As shown above, so far this year Large-capitalization and Value stocks continue to outperform all other style-buckets.
The U.S. economy shrank 0.2%in the second quarter, down from 0.4% in the first quarter (an annualized rate of 0.9% vs. 1.6% in 1Q) as consumers pulled back on spending and businesses worked to reduce inventories. It was the second-consecutive quarter of negative economic growth, meeting what non-economists seem to think is the "technical" definition of a recession. They are wrong - there is no numerical definition of a recession.
Unlike past recessions, hiring has been strong all year, with the unemployment rate near historic lows.5 At a Wednesday press conference ahead of the GDP data, Fed Chairman Jerome Powell said there are "too many areas of the economy that are performing too well" for him to think the US is in a recession.
The economic slowdown was attributable primarily to decreases in inventories, a deceleration in the housing market, and lower government spending. Consumer spending increased one percent, well below the inflation rate during the same period.6
Gasoline prices have declined noticeably in the last 6 weeks and now average $4.212 in the US - down 16% from the peak of $5.016 on 6/14/22.7 Since the price of gasoline factors into everything from food to luxury items, I am optimistic we will (finally) see a deceleration of inflation over the rest of the summer.
This Week: Key Economic Data
Monday: Institute for Supply Management (ISM) Manufacturing Index.
Tuesday: Job Openings and Labor Turnover Survey (JOLTS).
Wednesday: Automated Data Processing (ADP) Employment Report. Institute for Supply Management (ISM) Services Index. Factory Orders.
Thursday: Jobless Claims.
Friday: Employment Situation.
Source: Econoday, July 29, 2022
This Week: Companies Reporting Earnings
Tuesday: Advanced Micro Devices, Inc. (AMD), PayPal Holdings, Inc. (PYPL), Caterpillar, Inc. (CAT), Prudential Financial, Inc. (PRU), Starbucks Corporation (SBUX), Marathon Petroleum Corporation (MPC), Marriott International, Inc. (MAR).
Wednesday: CVS Health Corporation (CVS), Fortinet, Inc. (FTNT), PPL Corporation (PPL), Booking Holdings, Inc. (BKNG), Occidental Petroleum Corporation (OXY), Regeneron Pharmaceuticals, Inc. (REGN).
Thursday: Block, Inc. (SQ), Twilio, Inc. (TWLO), Amgen, Inc. (AMGN), Eli Lilly and Company (LLY), ConocoPhillips (COP), Air Products and Chemicals, Inc. (APD), Albemarle Corporation (ALB), Kellogg Company (K).
Friday: Berkshire Hathaway, Inc. (BRK.A).
Source: Zacks, July 29, 2022
"Innovation is saying ‘no’ to 1,000 things."
– Steve Jobs
Don’t Forget to Take Advantage of the Work Opportunity Tax Credit
The work opportunity tax credit is a federal tax credit for business owners that have hired individuals from target groups that would have otherwise faced significant barriers when looking for a job. Some target groups include summer youth employees, those receiving Supplemental Security Income, or qualified long-term unemployment recipients. There are ten targeted groups in total.
The work opportunity tax credit equals 40% of up to $6,000 wages paid or incurred with a maximum credit of $2,400. The WOTC may consider up to $24,000 in wages for certain qualified veteran targeted groups. There are some restrictions on the IRS’ site.
* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov8
Stay Safe This Summer With These Open Water Safety Tips
Summer is the perfect time to spend at the beach, lake, or river. But unfortunately, these natural bodies of water can also be hazardous if you don’t know how to stay safe. Here are some tips to help you and your family stay safe in the water this summer:
Tip adapted from the National Drowning Prevention Alliance9
A rain gauge collects rainfall each day of a wet week beginning on Monday. Every day, the amount of rain in the gauge doubles. At Sunday’s end, the rain gauge is completely filled. So on which day is it half-filled?
Last week’s riddle: I can't be seen, but I'm all around. I have no mouth, yet can make a sound. I can be harnessed, but never bound. No hands have I, yet I move the ground. What am I? Riddle answer: Wind.
Village of Hope, Hope Valley, Derbyshire, United Kingdom
Footnotes and Sources
2. The Wall Street Journal, July 29, 2022
3. The Wall Street Journal, July 29, 2022
4. The Wall Street Journal, July 27, 2022
5. CNBC, July 28, 2022
6. CNBC, July 28, 2022
8. IRS.gov, May 5, 2022
9. NDPA.org, May 26, 2022
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Weekly Market Insights: Markets Rally; Earnings Better Than Expected
August 01, 2022