Not worried by another Fed rate hike and news of a contracting economy, the stock market rallied on the last week of the month on better-than-expected corporate earnings.
The Dow Jones Industrial Average increased 2.97%, while the Standard & Poor’s 500 picked up 4.26%. The Nasdaq Composite index gained 4.70% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose 0.95%.
Stocks Rally on Earnings
July started off slow, with investors worried about how inflation may have impacted corporate earnings. To kick off earnings season, a big-box retailer missed earnings and reduced forward guidance last Tuesday, sparking a broad market retreat.
But sentiment improved following mega-cap technology company earnings that proved better than expected. Enthusiasm gathered steam in the wake of the Fed’s 0.75% rate hike, boosted by Fed Chair Powell’s comments following Wednesday’s Federal Open Market Committee meeting. Powell indicated that it might become appropriate to slow the pace of future hikes, and he didn’t believe the economy had entered into recession. Stocks on Thursday shrugged off news of a second-consecutive quarter of negative economic growth to build on Wednesday’s gains as fresh earnings continued to comfort investors.
The U.S. economy shrank at an annualized rate of 0.9% in the second quarter as consumers pulled back on spending and businesses worked to reduce inventories. It was the second-consecutive quarter of negative economic growth, meeting the technical definition of a recession. Unlike past recessions, hiring has been strong all year, with the unemployment rate near historic lows.
The economic slowdown was attributable primarily to decreases in inventories, a deceleration in the housing market, and lower government spending. Consumer spending increased just one percent, well below the inflation rate during the same period.
This Week: Key Economic Data
Monday: Institute for Supply Management (ISM) Manufacturing Index.
Tuesday: Job Openings and Labor Turnover Survey (JOLTS).
Wednesday: Automated Data Processing (ADP) Employment Report. Institute for Supply Management (ISM) Services Index. Factory Orders.
Thursday: Jobless Claims.
Friday: Employment Situation.
Ideas in a Volatile Market
1. Tax Loss Harvesting - If you have an after-tax brokerage account, consider selling stocks at a loss and reinvesting to lock in losses. This will allow you to offset future capital gains. If you have no capital gains for the year, these capital losses can offset up to $3,000 of other income and be carried forward into future years.
2. Roth Conversions - Consider converting IRA money into a Roth. This will allow your money to grow tax-free when the market recovers. We will need to be strategic with the conversion amount in order to optimize tax efficiency.
Wood Tarver is dedicated to giving back to our community and will be matching all donations to a selected charity each month as part of our monthly NestEgg newsletter. For the month of August, we have selected The Idaho Food Bank. Please see link to organization below.
Idaho Food Bank
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We trust you found this update to be educational and informative.
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As always, we are honored and humbled you have given us the opportunity to serve as your financial advisors.