S&P 500 Leads Dramatic Turnaround For Global Markets, But Risks Remain Elevated

Driven by across-the-board gains in the U.S., July was an excellent month for global stock markets. The S&P 500 gained +8.44%, the Dow Jones Industrial Average +6.06%, and the NASDAQ Composite +11.41%. It was the largest monthly gain for the benchmark stock index since November 2020 and the largest for its tech-heavy counterpart since April 2020.

Outside of the U.S., the IBEX 35 rose +0.71%, the Dax +5.48%, the FTSE 100 +3.54%, the CAC 40 +8.87%, the FTSE MIB +5.22%, the Euro Stoxx 50 +7.33%, and the Nikkei +5.34%. The CSI 1000 was the laggard, losing -7.02% for the month.

The turnaround comes after Fed Chairman Jerome Powell suggested the pace of interest rate hikes could slow sooner than expected. Furthermore, earnings season has been overall better than expected, with nearly 75% of S&P 500 companies reporting results beating estimates.

With those figures, the global stock market ranking in 2022 is as follows:

• British FTSE +0.53%
• Japanese Nikkei -3.44%
• Spanish IBEX -6.40%
• Dow Jones -10.18%
• Eurostoxx -13.73%
• S&P 500 -13.87%
• German DAX -15.11%
• French CAC -15.11%
• Chinese CSI -15.59%
• Italian MIB -18.07%
• NASDAQ -21.46%

Investor Sentiment (AAII)

Bullish sentiment (the expectation that stocks will rise over the next six months) declined 1.9 points last week to 27.7% and remained well below its historical average of 38% for the 36th consecutive week.

Bearish sentiment (the expectation that stocks will fall in the next six months) decreased 2.1 points to 40.1%. However, it remains significantly above its historical average of 30.5%.

The bull-bear spread (bullish minus bearish sentiment) is -12.4% and is unusually low for the 24th time in 27 weeks.

Recovery? What History Tells Us

Historically, the S&P 500 takes about 19 months to recover from a bear market. However, since 1982, if the bear market does not fall more than -30%, we have seen quick and consistent recoveries.

For example, in 1982, it took 3 months for the index to recover fully; in 1990, 4 months; in 1998, 3 months; in 2011, 4 months; in 2018, 4 months; and in 2020, 5 months.

The S&P 500 is down double digits so far this year. But here's a fun fact: if you had only been long on the S&P 500 on the days the Fed raised interest rates, you would have made a gain of +6.8%. In fact, the nearly +4% jump on Wednesday and Thursday was the biggest two-day gain on record following a Fed's interest rate hike.

On the other hand, had you been long every day this year except for those three days, you would have lost more than -20%.

The Dollar's Strength

The dollar is up nearly +11% YTD, helped by a hawkish Fed and rising geopolitical tensions that have boosted the dollar's safe-haven appeal.

Bank of America's survey of mutual fund managers shows that bullish positions on the dollar have reached their highest level in seven years. However, they fell in the last week. The value of the long dollar position was $18.46 billion (last week, it was $18.98 billion).

The strong dollar is impacting emerging market currencies and putting pressure on central banks worldwide to raise rates, even at the cost of a recession.

For example, the Indian rupee, the Chilean peso, and the Sri Lankan rupee have all hit record lows this year, despite efforts by central banks to try to stem the decline. In Hong Kong, investors have been buying local dollars at a record pace, while Chile's central bank intervened after the peso plunged more than -20% in five weeks.

Money Outflows In Europe

The Stoxx Europe 600 index rose to a seven-week high last week. European stocks rallied after a sharp drop in the year's first half as investors bet much of the negative news about high inflation and slowing growth.

In addition, recent weakness in U.S. economic data has also sparked optimism that the Federal Reserve may be less aggressive in raising interest rates at upcoming meetings.

Meanwhile, outflows from European equity mutual funds surpassed inflows for the 24th consecutive week.

The Brutal Trend Remains For Some Stocks

While global markets did enact a broad-based rebound last month, here's a good reminder that past performance does not ensure future returns.

Let's look at several Wall Street stocks that, in 2020, literally flew—only before collapsing in 2021-2022.

Nio (NYSE:NIO): +1112% / -68%

Quantumscape (NYSE:QS): +753% / -86%

Twist Bioscience Corp (NASDAQ:TWST): +580% / -76%

Workhorse Group (NASDAQ:WKHS): +551% / -86%

Farfetch (NYSE:FTCH): +517% / -88%

eXp World Holdings (NASDAQ:EXPI): +457% / -58%

Peloton (NASDAQ:PTON): +434% / -90%

Pacific Biosciences (NASDAQ:PACB): +405% / -80%

Sunrun (NASDAQ:RUN): +402% / -68%

Zoom Video Communications (NASDAQ:ZM): +396% / -75%

Now, here are the stocks that lost the most in 2021-2022, compared to their performance in 2020:

Gaotu Techedu (NYSE:GOTU): -97% / +137%

Ontrak (NASDAQ:OTRK): -97% / +279%

InVitae Corp (NYSE:NVTA): -92% / +159%

StoneCo (NASDAQ:STNE): -90% / +110%

FuboTV (NYSE:NYSE:FUBO): -88% / +214%

Lordstown Motors (NASDAQ:RIDE): -88% / +102%

C3 Ai (NYSE:AI): -88% / +230%

Fastly (NYSE:FSLY): -87% / +335%

Stitch Fix (NASDAQ:SFIX): -875 / +129%

Carvana (NYSE:CVNA): -85% / +160%

Recession? Yes But No

The official definition of recession speaks of two consecutive quarters of falling GDP. On that basis, the U.S. would already be in recession.

However, officially, the country only considers itself in such a scenario when the National Bureau of Economic Research (NBER) says so—and the private, non-profit, non-partisan research organization has not yet spoken on the matter.

The last 10 times the U.S. economy had 2 or more consecutive quarters of negative GDP growth, the NBER confirmed it was in a recession. You have to go way back to 1947 to see anything different from that.

There are voices saying you cannot be in recession with employment growth. But employment is just another variable. Let us remember that in the 1970s, there was a recession, and employment grew for 8 months straight—only before plummeting along with the broad economy.