Bear Market Rally or Bear Market Squeeze?

Weekly Market Recap Report

Equities rallied most of the week, but lost steam on Friday as poor economic data and the prospect of future Fed hikes remains elevated. Corporate earnings are coming in lower, but look better week-over-week. With 21% of S&P 500 companies having reported, 68% are beating earnings estimates and 65% are beating revenue estimates. That’s below the 5-year average, but an improvement over two weeks ago. Yet, guidance on corporate earnings calls has been worrisome. This morning, for example, Weber withdrew 2022 sales guidance, noting uncertainty from market factors.

The market is betting that the Fed will increase interest rates by 75 basis points on Wednesday.

We are not sold on that idea just yet, as the Fed's Dot-plot on future rate hikes currently extends into 2023. The economic calendar is full of releases this week and market sentiment on rates could change quickly. We will get the first release of 2nd quarter GDP on Thursday, after the Wednesday rate hike announcement. Market expectations on GDP have been all over the place. The current expectation is for a slightly positive number on Thursday. A surprise to the downside could add to market volatility.

One of the key recession indicators, although not 100% effective, is the inversion of the 10-year Treasury Bond Yield against the 2-year yield.

The 10-year / 2-year reinverted on July 6th and has remained inverted ever since. If the Fed indeed raises 75 basis points this week, the 3-month T-bill could invert with the 10-year Treasury, which would be a more immediate sign of potential recession. The job market is tightening as Initial claims have risen considerably over the past 15 weeks and Continued Claims are starting to rise. Investors seem to be anticipating a Fed pivot on rates, but a Bear Market squeeze is more likely. In the 2002 Bear Market, the Nasdaq posted 5 rallies, with an average rise of 31%, yet the drop from the initial peak to the ultimate trough was -78%. So far, the current Bear Market has experienced 4 rallies, but the overall trend is lower. We would caution on making significant bets on the current rally.