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3 Reasons for the Recent Market Recovery

The stock market steadily declined during the first half of this year, but in the last couple of months, it has bounced back a bit. In this episode of Coffee with Brendan, Brendan talks about three reasons we’ve seen an uptick in the market and what that may signal for the future.

Topics Discussed:

  • Market drops & upticks

  • Effects of the job rate, inflation, and corporate earnings

  • Historic comparison to current market conditions


Hi, and welcome to another episode of Coffee with Brendan. Today's episode is based off of an email I received from one of our longtime clients. He wanted to know that since the market had started the year and pretty much steadily went down between January and June, so the first six months of the year, why has it reacted so positively in the last couple of months, which would be July and August of 2022? Is this just a fluke? Or is this something that has some merit to it? So that's what we're going to talk about today. You know, what were or what are the three main reasons why the market has recovered and what a recovery like this typically signifies for the future prospects of the market.

So let me jump in. And we'll kind of set the stage. So we take a look at the market. This is pretty much what my client was referring to, is that if we look at year to date, we started the year off and just pretty much steadily went down. We had a nice little recovery between March and April, then went pretty much straight down from there, and bottomed out right around mid-June. Since mid-June, we've seen a nice little run until just recently. Today's an exception to the rule. You know, it actually has dropped pretty dramatically. Today, hopefully, it won't get a little bit back. But long story short, it's had a pretty nice recovery. And if you look at the 52-week range, it bottomed out about 3600, top down to about 4800. And Midway is right here. We had been up until last week past this 52-week mid-range. But we've kind of dipped right back to under the 50% Dip. But let's get into why that is.

So as I mentioned earlier, there are three main reasons why the market has had this nice recovery between the last couple of months, June, July, and August 2022. So the first thing is that unemployment came in much better than what we had anticipated. Specifically, US employers added 528,000 jobs in the month of June, which was significantly better than what economists expected; they actually expected it to be more like 250,000. So the number of jobs, and this is just kind of investing 101, the market builds in a lot of assumptions. And if the assumptions are here, and the news that comes out, and the actual news is up here and twice is good, then the markets gonna go up and vice versa, you know, had the economists thought that it was 250,000 jobs and only 100,000 came in that would have been looked at as a very negative thing. And why are jobs important, because you've probably heard that we've did a video on this, is that of a recession. A recession is typically signified with the economy contracting, but also job loss. And the fact that the jobs are actually going the exact opposite way, and employers are actually hiring people as opposed to laying people off is a positive sign that a recession may not be in the cards, even though there's still some strong signs that they are.

So there's been this like, tennis match between people that think that the market or the economy is going to go into a recession and the other side, who don't believe that the economy is going to go into recession. So that's that's number one is that Jobs came in much better, which kind of pushes or makes the argument that a recession will not happen. And typically, when a recession doesn't happen, the market does not fall as dramatically as if there was a recession. So that's, that is number one.

Number two is that the inflation numbers also came in better than what was expected. So again, the market had anticipated the inflation rate being here; inflation was actually a little bit lower. And so, therefore, the market jumped. And so that was number two, you know, and again, this is something that has plagued us since the beginning. Every year and pretty much throughout the year is the cost of everything going up. And one thing that really significantly kind of moved the needle in July was the price of gas. The price of gas has come down probably about $1 from its from its high. And that is a big part of the inflation number. And so when one of the major parts of the inflation number comes down, guess what inflation number comes down. And so the economist said, believe that the that the, they call the CPI, which is the consumer price index, and that is the measure of inflation. And they had a certain assumption, it actually came in a little bit better than their assumption.

And then the final thing that I don't know if I can share, because my compliance department probably would get mad at me is earnings. So what is that? So at the end of the day, I try to remind all my clients, and I've probably said this to you, if you are one of my clients, who's watching this, that the stock market at the end of the day, yes, it's impacted by geopolitical events. Yes, it's impacted by what happens in Washington. Yes, it's impacted by all sorts of different factors. But at the end of the day, the stock market is a temperature gauge of what's happening in business and in the business world. And so the third thing that has been positive over the last quarter has been earnings. In other words, profitability of different companies, how are companies faring, with these supply chain challenges with the inflation with the fact that consumers are starting to pull back their spending and not spending as much money on different goods and services. And the market pays very close attention to earnings, and specifically the big company. So if you look at the fortune 500 companies, or pretty much the 500 companies that make up the s&p 500, you'll see that this earning season, about three-quarters of them outperform what economists have actually expected. So once again, you know, you have a certain set of expectations that economists come up with, and when the actual results are that much better the market moves up.

So really, is those three things so so let's just summarize again, Jobs came in better than expected, inflation numbers came in better than expected. And company earnings came in better than that and better than expected. So all three of those things have come together. And a pretty much led to this big rise that we have seen over the past couple of months.

So one of the reasons why I'm shooting this video is because this little 52-week range, the midpoint, where it goes all the way down, but it needs to come back once. I'll put it this way. The market has dropped 20% 13 times since the World War II and every single one of those 13 times. So 13 out of 13 times when the market has gone down 20 income back halfway that signifies that it will the market will not touch again, that low. So there's an argument to be made that historically speaking, I'm going to be really careful with how I how I word this. But historically speaking 13 out of 13 times when the market has gone down and I'm back halfway, that typically means that it will not go back to the lows that it had seen. So in the case of here, the market went down to 3636 36. And what this is pretty much saying is that if history repeats itself, not a guarantee, if history repeats itself, and the market comes back halfway, that typically means that we will not see another 3636.

So hopefully that wasn't too promissory. I'm just pretty much saying that, historically speaking. It's a good sign when the market comes back halfway. Not saying we're out of the woods yet. I do think there could be some additional volatility if we look back to the last time that we had a situation like this, the market it was 2011. The market went down, over 20% came back, but then went down another 10% right after it came back. So again, we're not out of the woods, there probably will still be some volatility. We still have a midterm election, midterm elections typically create some volatility. But if history does repeat itself, the worst may be over.

So hopefully that was safe enough. So my compliance department will let me get this video out to you. If not, then then we'll have to reshoot this. So that's all I got for you today. I hope this was helpful and we'll look forward to our next coffee with Brendan. Take care


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

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