In A Nutshell: Is This a Bear Market Rally? Uncertainty Continues …

With signs of a recession looming and the ongoing threat of inflation, the markets still have some sorting-out to do.

By Ken Herman

Investors are proceeding into the second half of 2022 with caution after the capital markets realized their worst first six months in decades, The S&P 500 has plunged 21 percent since January, losing more than $9 trillion in market capitalization and suffering its worst first half of a year since 1970. Meanwhile, the Nasdaq Composite and Dow Jones fell 16 percent and 30 percent, respectively. 

Heading into the second half of the year, many are worried that central bank actions could push the global economy into a downward spiral. The latest reading from the Atlanta Fed’s GDPNow tracker is now in negative territory, predicting Q2 real GDP growth of -1.0 percent as of June 30. If that print comes to fruition, it would mark two straight quarters of negative real GDP growth (-1.6% in Q1), meeting the technical definition of a recession.

The big unanswered question is: will this market volatility continue? Earnings season, which kicks off later this month, could present the next trading risk, though you never know when buy-the-dip institutional managers and retail investors will step in and gain control of the markets. 

False Optimism?

Investor hopes were raised by economic data that included new home sales that were better than expected for May and a slight improvement in inflation expectations from the latest University of Michigan survey (potentially reducing the urgency for steeper interest rate hikes by the Federal Reserve). The best measure of America’s recent loss of hope may have been the university’s consumer sentiment index, whose preliminary estimate for June plunged to a record low of 50.2, down from 58.4 in May. 

Within this Michigan index, its “current economic conditions” reading plunged to 55.4 (down from 63.3 in May), and the “consumer expectations” index fell to 46.8 (down from 55.2 in May). Some possible good news (from all this bad news) is that contrarian theory says that when sentiment reaches such historic lows, the only way it can go is up. Capitulation usually comes when sentiment is lowest. That could mean that the current record-low consumer confidence may be a positive indicator.

A troublesome energy crisis is escalating not only in the United States but also across the globe, as myriad factors continue to impact flows, output, supply, and production. The latest warning bell went off recently as Germany announced it would move to the so-called “alert stage” of its emergency gas plan, seeing a high risk of long-term gas supply shortages. The crunch has been exacerbated by sanctions and Russia’s Vladimir Putin turning off the taps.

Obviously, our current administration’s war on American fossil fuels has primarily been to blame for shortages and high fuel costs in the U.S.

A Failed Strategy

President Biden’s recent four-point plan to lower prices at the pump (including a federal gas tax holiday) is not likely to provide any significant relief. After all, saving 18 cents per gallon is not much when a 10-gallon gas purchase creates only $1.80 in savings from today’s record-high prices. 

Even though his actions are largely to blame for fuel shortages and record-high prices, Biden is becoming increasingly frustrated with the rising gasoline prices at the pump. Recently Joe sent a letter to seven major oil companies, calling for “immediate actions” to supply more fuel, saying that his administration was prepared to use “all reasonable and appropriate” tools to help boost the fuel supply. 

Hey Joe, here is our suggestion: Open up our country again for drilling and exploration. It also would help to complete the Keystone Pipeline!

About the author

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in Glendora, Calif.