Why the Stock Market Rebounded in July and What’s Next, Experts Say
Last month, the stock market delivered a storyline that rivals any TV show.
After an almost historic drop during the first half of the year, the S&P 500 — a popular index to which many 401(k) accounts are pegged — rebounded in July with its strongest month since November 2020. The other major indexes, the tech-heavy Nasdaq and the Dow Industrial Average, also reversed their performance.
The sudden change came despite little change in the economy. Consistent with recent months, the government has released mixed economic data and the Federal Reserve has stepped up a series of increases in borrowing costs intended to slow economic activity, reduce demand and reduce inflation.
The explanation behind the rebound, investment strategists told ABC News, is why investors shouldn’t expect it to last: expectations.
This hardly resembles the stuff of a stock market boom, which hinges on investor optimism about the prospects for corporate earnings.
In the first half of the year, as the market slumped and pessimism reigned, investors lowered their expectations, strategists said. Last month, when the Federal Reserve signaled it would one day cut rate hikes and many companies reported better-than-expected earnings, investors saw reason for a shift in sentiment, they added.
Strong July returns are raising expectations, however, the market is bracing for underperformance amid continued economic challenges, such as inflation, the Russian-Ukrainian war and supply chain disruptions induced by the pandemic, the strategists said.
“It’s not about right or wrong,” Ryan Detrick, chief market strategist at Carson Group, told ABC News. “It’s about better or worse.”
“The expectations were so low – the wick was there,” he said. “We needed everything to start this fire.”
Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, said it will be difficult to keep this fire burning.
“Unfortunately, along with rising stock prices, you also have rising expectations,” he said.
For months, market sentiment has tensed under the weight of an economy plagued by a glaring imbalance between supply and demand. A surge in demand followed a flood of pandemic-induced economic stimulus that combined with a widespread shift towards goods instead of services. Meanwhile, this stimulus has led to a rapid economic recovery from the March 2020 downturn, sparking a hiring drive.
But the increase in the demand for goods and labor far exceeded the supply. COVID-related bottlenecks in China and elsewhere have slowed delivery times and infection fears have kept workers on the sidelines. In turn, prices and wages soared, eventually causing sky-high inflation that not only lasted for many months, but also worsened, even as economic growth slowed and recession fears grew. .
Taken together, near-historic inflation and sluggish economic activity drove stock market investors away in the first half of the year, said Samana, senior global market strategist at the Wells Fargo Investment Institute.
“People, to a certain extent, had thrown in the towel on equities. They were worried about the Fed, worried about China, worried about commodity prices, worried about a recession” , did he declare. “There was no shortage of worries.”
“What often happens when you have this level of worry is that everyone is on one side of the boat,” he added. “Then what happens is you get a piece of data that’s not as bad as feared, and people switch to the other side. It causes a herd mentality.”
Market strategists largely attributed July’s U-turn to the Federal Reserve signaling it would raise its benchmark interest rate by 0.75%, which it finally did on Wednesday – a significant hike but less than the 1% increase that some observers originally feared. Additionally, investors seized on comments from Fed Chairman Jerome Powell on Wednesday that the pace of rate hikes would eventually slow.
“People think the Fed will have to change its mind sooner rather than later,” Mike O’Rourke, chief market strategist at JonesTrading, told ABC News.
During the first six months of the year, the S&P 500 fell 20.6%, marking its worst first-half performance since 1970. But the index fell 9.1% in the last month alone.
July’s blistering pace is not sustainable, strategists said. Additionally, investors should expect volatile highs and lows for the rest of the year, they added.
O’Rourke of JonesTrading said investors should expect a volatile market for the next six to 12 months. Other strategists echoed that view, including Detrick, who warned investors shouldn’t treat July as a turning point. That said, he urged them to stay the course.
“This year has been historically volatile and disappointing for investors,” Detrick said. “Panic and selling when everything is at its darkest is the worst time to do it. Hopefully this rally in July reminds investors of that.”
“But the truth is, we’re not off the hook,” he said.