U.S. stocks closed Friday near session highs following strong earnings from several technology companies.  July also marked the best month for U.S. markets in 2022.  The S&P 500 was 9.12% higher to close out the month, representing the index's biggest monthly gain since November 2020.  The Dow also finished July up 6.73% and the Nasdaq closed up 12.35%.  Michael Darda, Chief Economist and Chief Market Strategist at M-K-M Partners, joins Cheddar News' Closing Bell to discuss.

Closing Bell

U.S. Stocks Near Session Highs, July Marks Best Month For Markets of 2022

it was a very strong week, a very strong month. And so let's run through some of the positive today. You see the NASDAQ up 1.9% ending near the session high, the S and P up 1.4%. The dow hired by 1% for the week, the S and P up more than 4% the dow higher by 3% the NASDAQ up nearly 5%. And then for the month, the S and P up 9% the tao of almost 7%. The NASDAQ up a whopping at 12%. SNP best month since november of 2020 around the presidential election. The NASDAQ having its best month since april of 2020 after that massive sell off that we saw at the start of the pandemic. So joining me now is Michael Darda, chief economist and chief market strategist at M cam partners, which bills itself as an institutional equity trading salesman research firm. Michael, thank you so much for joining on a good day in the stock market. What do investors need to know? Thanks for having me, Kristen, I think what investors need to know is that the stock market collapse that happened in the first six months of the year, was really driven primarily by one thing and that was a steep rise in the 10 year Treasury yield from 1.5 to almost 3.5%. And that has reversed partially down almost a full percentage point. You mentioned before that it was a fairly easy equation. Uh and I think that's exactly right. And so that multiple collapse that took place in the first six months of the year has also partially reversed. So with slowing growth and these recession fears, we're also getting a pullback in long term interest rates and in fed tightening expectations. And that's been enough to buoy a market where sentiment was just absolutely on the floor, whether it's consumer sentiment surveys or whether it's retail investor sentiment surveys when you have a washout like that, it's really a mistake to get too negative. And that's something we've been talking to clients about for the last month or so. I'm glad that you note that Michael we have seen a sentiment so bearish. I think it was the bearish most bearish actually by one account, one survey since the start of the financial crisis and you're right, can't historically be a contrarian indicator when it's so bearish, might be a good time to actually buy. We've seen a relief rally generally companies still exceeding expectations. The S and P expected to see profits here in the second quarter as we make our way through earning season as we look further out. What should investors prepare themselves for? Do you expect growth to continue to slow here in the months ahead? I do. Um you know, there is rising recession risk anytime you have a growth slowdown, but the growth slowdown is necessary. The inflation problem that we have and that we saw more evidence of today was due to growth simply being way too fast. The productive potential of the economy cannot absorb double digit nominal demand increases anymore. And so we're going to need to have growth slow and we're going to have to deal with the elevated recession risks that come with that. The reason it's not hurting the stock market right now is because of falling long term interest rates. And the fact that the market already fell a lot. I mean, the market had its recession, Uh, in a way in the first half of the year. And so this rally could continue for a while. I'd be a bit surprised if we were to make new highs for the year. I think the market is going to be hemmed in here to some degree by the potential for long rates to back up a bit, uh, in the future. I don't think the Fed is going to be quick to start cutting rates next year. And the market is betting on almost 100 basis points of rate reductions in 2023 versus the end of 2022. I think that's kind of a tall order. Um, and on the other side of things, obviously, if there is a recession in the future, then investors are going to be concerned about earnings declining. There's been a lot of fear about that. But so far the, you know, the earnings results have been okay non disastrous and that's been enough. So here's a question, Michael, if you don't think we see new highs by the end of the year, what are the chances or the odds that we see new lows? Yeah, that's a great question. I think in a recession, actual recession scenario, that would be the risk because then the market would have to grapple with a decline in the level of earnings. The sell off in the first six months of the year was really about rising discount rates in that lowering stock market valuations and the fact that earnings have held up in long rates have come down. That's enough to catalyze the rally that we've seen take place in an actual recession scenario, then you've got something else to grapple with. And that's where the risk of a potential new low could occur. But my message for the retail investor is it's going to be impossible to time that the fact that the market fell almost 24% 23 a half percent In the first half of the year, your typical bear market associated with a recession is just over 30. So if you didn't get out of the market in the beginning of the year before the declined, don't try to time it. I would just stick with the market, uh, and, and ride it out here because who knows, maybe we do run up and it's closer to new highs than new lows going forward? The five multiple points nearly that we lost in the first six months of the year. Very rare historically, there have only been a few Postwar incidents where that's occurred and uh, in every case the market's been up double digits over the next 12 or 24 months. And, and so that's what we're seeing play out right now. So I think we have to respect that trend. Michael. This is such good insight. I do want to ask you about to risk factors that I think I did add to some pretty bearish sentiment this year. We talked about how it's really the yield curve, the Fed's policy moves that really by and large is driving the stock market, as has historically been the case. Um, but we also saw Shanghai shut down for four weeks, more than 20 million people lived there and had a huge impact on the global supply, chain likely leading to higher prices or inflation, which has caused the Fed to act. And then of course Russia's ongoing invasion of Ukraine without an end in sight, also contributing to inflation, causing the Fed to act via higher gas prices. How do you manage those two risks when you think about the path forward for the stock market? You know, the bull case for the equity market in the second half of the year, is that the headline inflation numbers come down sharply. So we've already seen a collapse in commodity prices, The china lockdowns that created all the supply chain upheaval in the second order, have at least started to ease. And so that Q two GDP data where we had high inflation and zero or negative real growth, that's what an adverse supply side shop looks like stagflation. So in the second half of the year, if some of those impulses are reversing and if the Fed simply slows the pace of rate hikes, that could be a fairly bullish catalyst for equity markets. And I think we're seeing that play out that's overwhelming the, you know, the, the concern about recession and earnings actually declining that we talked a little bit about before. Uh, so you know, so I think there is a, there is a silver lining here, the front, the inflation trade really has collapsed the dollars way up, commodities are way down, inflation expectations are materially below the highs money supply growth is essentially stopped. So if you think about what happened before inflation took off and turned out to be a lot more persistent and widely expected, all of those things are going in reverse gear now. So that's, that's a good story. Uh That is definitely the bull case between now and your and Michael, what do investors need to keep on their radar, what are the major data points? The major news that they should be staying on top of. I mean, aside from earnings, I would actually watch the labor market very carefully here. There's a big debate about recession and the two down GDP quarters, But really what's going to tell the tale is the level of unemployment, if it starts to move up in a persistent fashion, that will be a telltale sign that the economy actually is falling into recession. That has not happened yet. The unemployment rate fell in the first quarter and went sideways in Q2 and we created a lot of jobs over a million jobs per quarter. So that's a lot of things, but it's not a recession. If that changes in the second half, then I think the recession case ends up becoming much stronger. But I actually think, you know, the recession eventually will have one. I think it's going to be a bit further down the road. Fed policy works with a lag. The Fed has been acting in a rapid fashion. So, you know, the risks are, are certainly uh elevating now, but you know, our best guess is is the recession maybe comes a bit later than than what some have anticipated. Okay, Michael Darda, I hope you'll come back on the show, a really good insight on this friday afternoon, A great month in the stock market will take it. Michael is a chief economist and chief market strategist at M cam Partners