Another strong week for risk assets. The S&P 500 added 3.3% last week – its fourth straight week of gains. The index has now recovered half of what was lost in the first half of 2022 and stands at a year-to-date return of minus 10.2%. Following a 3.1% gain last week, the Nasdaq is now technically back in a bull market with the index up 22.6% since June 16th. Overseas, European stocks returned 1.9% while Japanese stocks jumped 2.6%. In fixed income, the 10-year U.S. Treasury yield finished the week largely unchanged at 2.83%.
“Slow fashion” is a growing trend where garment designers consider not only the impact of the entire supply chain, but also the entire product cycle. Investors may wish to adopt a similar mindset when it comes to assessing the economic cycle. While a strong employment report and downtick in the pace of inflation have lifted risk assets further, economic data still seem likely to weaken in the quarters ahead with leading economic indicators continuing to moderate.
Between its peak in 2000 and its eventual bottom in 2002, the Nasdaq experienced four rallies that were over 20% (two of them were over 40%). While the recent rally in U.S. equites is rightfully reflecting the impact of lower bond yields, better-than-hoped for corporate earnings, and hopes of a less aggressive Fed, it may not be reflecting the potential for a notable slowdown or recession. A soft landing remains possible, but we think it’s too early to conclude that the full impact of monetary policy tightening has already been felt. As such, like “slow fashion,” we remain focused on quality stocks and quality fixed income.