- S&P 500 closes down again on Thursday by 0.88%.
- SPY falls 20% in the first half of the year.
- Bonds also fall in the first half, making it a terrible year for asset portfolios.
The S&P 500 or SPY ETF closed out the half-year in a subdued fashion on Thursday as the anticipated repositioning did not materialize. Long-only investors and mutual funds opted to remain underweight equities. July is historically one of the better months for S&P 500 performance and is the best performing month historically in the third quarter.
As we can see, this half of the year has been a terrible one for stock and bond portfolios. The Fed has been behind the raging inflation curve and has pivoted way too late to a hawkish policy.
Now financial markets are betting on recession, and the latest GDPNOW figure from the Atlanta Fed is not exactly comforting. It is showing expected Q2 GDP falling 1%.
The bond market as mentioned is convinced the Fed is hiking into a recession and has been pricing rate cuts for early 2023. Given that the Fed is late to the party, we see that as highly unlikely. They always over-hike and then over-cut. They have largely moved inflation from transitory by their policies and are now likely to engineer a deep recession by hiking for too long. All this means of course that equities and risk assets will again find H2 to be a tough ask.
We do not expect a huge amount of volatility now as we enter earnings season. We expect this earnings season to be when the penny drops with Wall Street analysts as EPS forecasts will be cut and the S&P 500 will naturally then edge lower. Remember macroeconomics impacts EPS which in turn impacts stock prices. Macro remains poor in most regions and the global economy is slowing markedly. International trade is more expensive, there are more barriers to trade, and energy costs are pricing sticky.
Corporate earnings in the US will also be hit by conversion charges of overseas currency earnings into a strong US dollar. There is a strong correlation between lower earnings for corporate America and a strong dollar.
Still, SPY has a gap to be filled from $395 to $401. Resistance above is $415 which is key.
SPY stock chart, daily