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As I wrote last time, this week was always going to prove volatile with so many potentially market moving events taking place, including the latest US Federal Reserve monetary policy announcement alongside the release of a swathe of key corporate earnings.

If pictures can paint a thousand words then perhaps it's no truer than the charts below. The first chart below shows the performance of the S&P 500 over the last year, prior to this week. I have drawn in lines of support and resistance which show a clear downtrend going back to early 2022, which the S&P 500 has been unable to break out of.



Fast forward to this Friday, and before US markets are even open, the chart now looks very different with the S&P 500 exploding higher. At the time of writing the rally is set to continue on Friday, towards 4100, when US stock markets open.



From a technical perspective it means that the S&P 500 has broken out of its multi-month downtrend. Obviously that is very positive and the S&P 500 is up an impressive 11% from its low on the 16th June, even managing to drag other global stock markets eventually higher. By way of example, the German DAX is up over 8% since its low on the 5th July.

So what has sparked this week’s breakout? 

This week’s earnings reports initially got off to a rocky start with Walmart’s share price dropping 10% after the retailer warned on profits for the second time in 10 weeks. This proved a drag on the wider market. Elsewhere Credit Suisse shares tumbled after reporting a larger than expected second-quarter loss. The bank’s share price is down more than 40% in 2022. But on a brighter note German banking giant Deutsche Bank reported a more than 40% jump in profit but warned that the second half of the year would be more challenging.

The brighter note continued as the week progressed with US tech giants lifting the mood further. Despite Google's parent company, Alphabet, reporting that its revenue growth had fallen to its slowest pace in two years, the market consensus was that the tech giant was weathering the economic slowdown better than expected. Alphabet’s share price leapt more than 7% in the 24 hours after the announcement.

Microsoft and Apple also helped calm equity investors’ recent jitters further. While Microsoft’s revenue and earnings missed analysts' forecasts the strong performance of its cloud computing business saw its share price rally 4%. Apple’s sales and profits beat analysts’ expectations and it was also positive about the prospect for future revenue growth, which sent its share price higher by 3% in after-hours trading on Thursday. As goes Apple, so goes the market

It meant that the market narrative seemed to shift in favour of technology stocks once again, focusing on their potential to weather an economic slowdown. A narrative that also took hold during the pandemic and ultimately propelled technology stocks to new all-time highs in 2021. 

Technology stocks have been the epicentre of 2022’s bear market, with the tech-heavy Nasdaq 100 down more than 20% since its November 2021 high, as shown by the blue line in the chart below comparing its performance against the broader S&P 500 in red. 



But US technology stocks are starting to not just represent a potential shelter from any economic storm but they are also starting to represent something they’ve not done for years… good value.

This week I have been analysing the value opportunities that exist not just across global stock markets but also within them. This research will be published in August, but based on one significant measure of value, technology stocks are now no longer eye-wateringly expensive based on recent history, but instead represent something heading towards fair value. 

This will have piqued the interest of investors that have been waiting for a re-entry point into tech stocks, which have underperformed in the first half of the year. This week might just be that re-entry point.

Yet this week's impressive stock market rally was not just about corporate earnings. The biggest catalyst that caused US stock markets to explode higher, and especially technology stocks, was the US Federal Reserve’s latest monetary policy decision. More specifically it was the press conference comments from Jerome Powell, the Fed Chair, that got markets excited. 

Ultimately, the Fed raised interest rates by 0.75%, in line with market expectations. But it was Powell’s suggestion that US interest rates are now at a neutral level and any future moves would be data-dependent that whipped bond and equity markets into a frenzy. The riskier the asset the greater and more positive the response. The Nasdaq 100 rallied more than 4% in the hours after the comments on Wednesday. But why exactly?

The market narrative seems to have shifted significantly this week. Previously the belief was that the Fed would hike interest rates and ultimately crash the economy, with its sole focus on bringing down inflation. With the removal of any kind of guidance on the path of interest rates, by just saying it will be led by future economic data alone, markets interpreted this as a dovish pivot from the Fed. To use an analogy, the market had previously believed the Fed intended to keep the accelerator pressed firmly down until it caused a crash, but the market now believes the Fed has decided to take its foot off the pedal and become more reactive.

It means that market interest rate predictions have tumbled and the market is no longer assuming that interest rates will head higher regardless of the damage to the economy. This was positive for US tech stocks and bonds in particular. But of course such is the power of the Fed that similar positive moves were seen globally in stocks and bonds. But this was the week that just kept giving. After the close of play on Thursday, Amazon’s earnings report and upbeat forecast for Q3 sent its share price soaring by 12% in after-hours trading. 

This added more fuel to the wider stock market rally. We saw signs of investor FOMO this week as well as the buy the dip mentality taking hold. Even the news that the US economy had technically entered a recession, marked by two quarters of GDP contraction, couldn’t dampen the mood despite the surprise news. If anything, investors hoped that the new data-dependent Fed would listen to this new data point and take its foot fully off the accelerator and avoid a crash.

So is this stock market rally finally sustainable or is it another bear market rally? After all, if you look at the earlier chart of the S&P 500 we’ve seen a number of false breakouts this year already. Not only that but there is still a strong argument that we are in a downtrend dating back to the November 2021 highs, as shown in the chart I shared last week.  

In the bear markets that started in 2000 (the dotcom crash) and 2008 (the financial crisis) the largest bear market rally was 23%. That happened between November 2008 and May 2009. So certainly the current rally could have much further to go. But after that 23% rally in 2008/9 the S&P 500 fell more than 27% before hitting the ultimate bottom achieved during the financial crisis. The message is that the size of the current rally doesn't really tell us anything.

What we have this week is that investors now believe that central banks can and will be able to navigate the economy through a slowdown based on the economic data. Not only that, but they seem to be assuming that there won’t be any surprises in that data to force the Fed back on the accelerator pedal. But ironically things could become even more volatile, not less in the coming weeks and months, especially in areas that have rallied this week such as tech. That's because every piece of economic data now matters even more. Any surprises could see the market hastily rewrite its narrative once again.


Data update

As Monday marks the start of a new month I will publish a new Best of the Best selection and Best Funds by Sector tables then.
 

Best Wishes
 
Damien Fahy
80-20 Investor & Money to the Masses founder

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