Stocks started the third quarter in better form after the declines suffered in the first half of the year with US stocks adding 9.2% and bonds posting a gain of 2.44%

Stocks started the third quarter in better form after the declines suffered in the first half of the year.  Corporate earnings were more resilient relative to expectations.  With 56% of the S&P 500 companies reporting by the end of July, according to FactSet nearly 75% reported per share earnings ahead of expectations.  Overall, earnings were on track to rise 6% in the second quarter.  While this would mark the slowest rate since the end of 2020, investors may have been relieved that company performance results did not seem to weigh too heavily on company balance sheets due to inflation and slower economic growth.  In fact, the U.S. economy shrank at a 0.9% annual rate in the second quarter, according to the Commerce Department, marking the second consecutive quarterly decline in GDP that by some accounts constitutes a recession.  This did not deter the Federal Reserve from raising its federal-funds rate by 75 bps to a range between 2.25% and 2.75% in its efforts to bring inflation down.  Stocks across the board registered gains ranging from 9.2% for the S&P 500, 6.8% for the Dow Jones Industrial Average and 12.0% for the Nasdaq Composite.  The S&P 500 was in positive territory throughout the month but picked up momentum starting on July 14th following which it only registered three down days.  Refer to Chart 1.  Growth stocks rebounded across small, mid-cap and large-cap stocks, ranging from 11.6% to 12.8%, respectively.  Small cap stocks, measured by the Russell 2000, recorded a gain of 10.4%.  All 11 industry sectors across the board posted gains, led by large cap gains in the Consumer Discretionary (18.9%) and Information Technology (13.5%) sectors that took over leadership starting in mid-June from the Utilities, Consumer Staples, and Healthcare sectors.  That said, worries about inflation, higher interest rates and corporate profit growth were in part responsible for pulling the S&P 500 down 12.6% on a year-to-date basis.

Stocks also rebounded overseas, particularly in developed markets, with the MSCI All Country World, ex US Index posting a gain of 3.5% while the MSCI EAFE Index added 5.0%.  Emerging markets, on the other hand, gave up 0.2% according to the MSCI Emerging Markets Index.  China was down 9.4%.

Most commodity prices have started to put the brakes on recently.  The Bloomberg Commodity Index, ex Energy, recorded a decline of 0.6%.  Natural gas was a strong exception, scoring a gain of 52.9% while a composite of crude oil prices dropped 2.7%.

After the first two quarters of 2022 recorded the worst US bond market returns since 1980 on the back of significant increases in US interest rates, July also delivered a positive beginning for bonds at the start of the third quarter and offered investors some relief from year-to-date and trailing 12-month declines. The US bond market returned 2.44%, according to the Bloomberg US Aggregate Bond Index while the global bond market returned 2.13% per the Bloomberg Global Aggregate Bond Index.