July Market Commentary – Posted August 12

Lauren Demytruk - Mar 10, 2023

With July’s market turnaround investors are wondering if this is simply a dead cat bounce or has the market direction truly shifted?

July offered a considerable sigh of relief for market watchers, especially after June’s dismal performance. The TSX was up +4.41% on the month and the S&P 500 was up a whopping +9.11%, a welcomed shift in the markets to start the third quarter. With the major central bank rate hikes out of the way and another round of positive earnings being reported it would seem as though a more optimistic sentiment is beginning to take hold amongst investors. Although, many market pundits remain skeptical of the July rebound suggesting it is a dead cat bounce driven by the most oversold companies in the index. We suggest this is merely a common characteristic of market troughs and as Brian Belski points out “in six of the last seven major market corrections the most oversold stocks were the key drivers of the rebound and posted the strongest returns on average six months after the market troughed.” Furthermore, we recognize that investors were willing to overlook “quality” factors earlier this year as the skepticism regarding the sustainability in profit margins were growing. In our view, July’s rebound points to a rising confidence in fundamentals heading into Q3.

We’re now beginning to see some potential relief on the inflation front. In the U.S. inflation data recently revealed that price increases slowed in July easing the strain on household budgets. While still elevated, price hikes waned from the near-historic pace reached in June giving hope to policymakers and consumers that inflation has peaked. The consumer price index, or CPI, rose 8.5% over the past year as of July which is a marked slowdown from 9.1% in June, according to the Bureau of Labor Statistics. On a monthly basis the consumer price index rose 1.3% in July, remaining unchanged from the rise in June, according to the bureau. While food and shelter costs increased over the last month, the gasoline index price fell 7.7% in July to offset those increases. Perhaps, it is premature to declare a win on the inflation war but with respects to corporate profit margins on a trailing-12-month basis, profit margins for S&P 500 companies are higher now versus the start of the year. Research also indicates, that the Next Twelve Months (NTM) profit margin projections have been holding up well having contracted just 23 basis points since the end of 2021 and with 45% of the index exhibiting upticks in margin forecasts. From this perspective it’s difficult to see the markets exhibiting further weakness.

If you would like to receive a full copy of our July market commentary, email us at mmbwealth@nbpcd.com!