Is the July Rally a Temporary Blip?

Tuesday’s dip, led by Fed anxiety and some bad news, is disquieting.



Stocks have run into some trouble, with the S&P 500 down by more than 1% on Tuesday. That marks a reversal from the market’s July rebound, with the index up 3.6% for the month through Monday’s close. Chalk it up to the heebie-jeebies about the Federal Reserve’s dedication to tightening and downbeat earnings reports amid fears of a recession.

On the eve of the Fed’s latest expected rate increase, this all makes the July market upswing feel like a bear market rally—a temporary reprieve from a negative trend.

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With an inflation rate over 9%, bears are sowing doubts that the inflation can be licked soon, which would allow the Fed to ease back on its rate-hiking. Bears argue that investors have been fooling themselves. Morgan Stanley Wealth Management’s CIO, Lisa Shallett, told clients in a note that the Fed likely will be raising interest rates for some time.

 “The latest bear market rally in our view is full of wishful thinking,” she wrote. “We worry that equity investors are conflating a peak in the acceleration of Fed policy with an end to Fed tightening. History suggests inflation needs to peak before the Fed will stop tightening.”

The possibility and timing of a recession is again weighing on investors. Economist Nouriel Roubini, head of Roubini Macro Associates, said that odds are very strong for a deep recession, not the light economic downturn that many expect. Blame the high debt loads that have been run up due to a long spell of low rates, plus chronic supply problems from the pandemic, Roubini told Bloomberg TV.

To underscore this sour outlook, two U.S. business giants had some bad news.

Walmart announced that its earnings for the second quarter would dive 8% to 9%, and fall 11% to 13% for the year. The culprit: inflation, which the retail chain said was crimping its sales. The stock slid 8% on Tuesday.

Meanwhile, General Motors missed Wall Street earnings estimates because, it said, parts shortages had prevented it from shipping out nearly 100,000 vehicles to the sales lot. GM shares were down 3%.

San Bernardino County Moves to Trim Foreign Stocks

The California county’s plan, already low on equities, reduces its stock allotment further due to the world’s troubles.



Investing abroad has been a longstanding trend among asset allocators seeking greater diversification. But the $14.2 billion San Bernardino County Employees’ Retirement Association is pulling in its international stock investments and shifting the money to domestic equities.

 

The program, as of March, has 13.2% of its assets in domestic equities with a target of 17%, and is drawing down its international developed market equity and emerging market debt holdings. Foreign stock is 11.7% and EM debt 6.7%.

 

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The asset realignment seeks to adjust to “a world where supply chains are realigned due to macro political factors, trade flow, and a deglobalization trend away from China,” says a statement from the plan.

 

“Sanctions on Russia highlight the global sensitivity to a USD-based system, potentially increasing the likelihood of separate spheres of influence between the U.S. and China,” it explains. “The regulatory reset and similar top-down initiatives may incite further volatility on the country’s long transition path, creating a tail-risk for market and economic contagion.”

 

The San Bernardino plan has a remarkably low amount of stocks; they make up about a quarter of its assets. The fund is concentrated on income generation amid today’s low returns, and is maintaining cash on hand at 7.4%, which it says it might use for opportunistic purchases.

 

Public plans typically have a higher allotment of equities—47.2% of assets as of last year, according to the Public Plans Data list, with fixed income the next largest category, at 22%.

 

Related Stories:

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