Interest Rate Hike + Weak GDP = Big Jump in Markets?

The major market indices finished the week higher despite a second straight 75 basis point rate hike from the Fed and a fresh report showing the US economy contracted during the second quarter.

August 01, 2022    |    By Michael Schwager

Performance for Week Ending 7.29.2022:

The Dow Jones Industrial Average (Dow) finished up 2.97%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 4.17%, the Standard & Poor's 500 Index (S&P 500) gained 4.26% and the Nasdaq Composite Index (NASDAQ) tacked on 4.70%. Sector breadth was positive with all 11 of the S&P sector groups closing higher. The Energy sector (+10.30%) led the advance followed by Utilities (+6.46%) and Industrials (+5.70%).

Index* Closing Price 7/29/2022 Percentage Change for Week Ending 7/29/2022 Year-to-Date Percentage Change Through 7/29/2022
Dow 32845.13 +2.97% -9.61%
Wilshire 5000 41119.59 +4.17% -15.15%
S&P 500 4130.29 +4.26% -13.34%
NASDAQ 12390.69 +4.70% -20.80%

*See below for Index Definitions

MARKET OBSERVATIONS: 7/25/22 – 7/29/22

The major market indices finished the week higher despite a second straight 75 basis point rate hike from the Fed and a fresh report showing the US economy contracted during the second quarter. Markets seem to have morphed into a phase where bad news is being viewed in a positive light as investors seem to be betting that the weakening economy may force the Fed to take its foot off the brake pedal sooner rather than later. Strong corporate earnings have also boosted optimism that profit margins may yet withstand the pressure from scorching inflation and gloomy consumer sentiment. The S&P 500 finished the month of July up 9.11%, its best monthly performance since November 2020, and has now rebounded by 12.6% from the mid-June low point.

GDP Contracts for Second Straight Month: U.S. gross domestic product (GDP) dropped at a 0.9% annualized rate in the second quarter, driven by a decline in consumer spending and private inventories, as well as weaker housing and business investment. The contraction followed the economy shrinking at a 1.6% pace in Q1, translating into two consecutive quarters of negative growth and meeting the technical definition of a recession (Note: official recessions are determined by the Dating Committee of the National Bureau of Economic Research who monitor several different indicators with a broad focus on employment data). The report resulted in traders paring bets on future rate hikes as the drumbeat of recession grew louder amid the ugly economic print. While it remains debatable whether the US economy is currently in a recession, there is no denying that recent economic data is signaling a rapid downshift in activity amid elevated inflation and tighter monetary policy.

FOMC Meeting: As widely expected, the Federal Reserve delivered a second straight 75 basis point rate hike, bring the Fed Funds rate to a range of 2.25%-2.50%. According to the after meeting statement, the Federal Open Market Committee remains “strongly committed to returning inflation to its 2% objective,” repeating previous language that it's “highly attentive to inflation risks.” The committee reiterated that it “anticipates that ongoing increases in the target range will be appropriate,” and that it would adjust policy if risks emerge that could impede attaining its goals. The FOMC vote, which included two new members -- Vice Chair for Supervision Michael Barr and Boston Fed President Susan Collins -- was unanimous. The FOMC noted that “recent indicators of spending and production have softened,” but also pointed out that job gains “have been robust in recent months, and the unemployment rate has remained low.” During the follow-up press conference, Fed Chair Powell said an additional 75 basis point rate hike for September was not guaranteed as the central bank sizes up "the data on a meeting-to-meeting basis." The next FOMC meeting isn’t scheduled until September 20 & 21. In the meantime the Fed will have the ability to dissect two more Consumer Price Index reports (Aug 10, Sep 13), two more Payroll reports (Aug 5, Sep 2), and two more reports on monthly Retail Sales (Aug 17, Sep 15).

Q2 Earnings Season: With over half the members of the S&P 500 already reporting, second quarter results continue to trend at a better than feared pace. Through Friday, 277 members of the S&P 500 have reported results with over 73% surprising to the upside. Aggregate earnings for the group are up 6%, moderately above the 4% consensus estimate from early June. The strongest quarterly results are coming from the Energy, Industrials, and Health Care. When all is said and done, S&P 500 second quarter earnings are currently expected to rise by 6.6%.

Market View: Our cautiously optimistic view on the markets remains intact. While not ruling out a retest of the recent lows, we have been encouraged by the strong rebound off the mid-June trough. While equity valuations have perked up a bit in recent weeks, they remain well below levels at the start of the year and still suggest a lot of negative news and uncertainty has already been discounted in the markets. With inflation still running hot, the Fed is likely to continue to hike rates, although the recent string of aggressive hikes is likely to moderate at future meetings.

The Week Ahead: With the July FOMC meeting now behind us the attention will now return to the data calendar. The focal point this will be the US payrolls report for July on Friday. The resilience of the labor market will be even more closely watched than usual given last week’s Fed rate hike and the negative Q2 GDP reading. According to Bloomberg, July nonfarm payrolls are forecast to expand by 250K and the unemployment rate is expected to hold steady at 3.6%. Other important data releases include the ISM Manufacturing and Services indices, with a particular focus on their prices paid components. It will be another busy week on the earnings front with over 150 members of the S&P 500 scheduled to release results. Fed Heads will be out and about with four different presentations on the calendar.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

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