The markets experienced some much needed relief in July as all major indices posted their best month of 2022. Although still in a bear market, the Dow Jones Industrial Average gained 6.7%, the Nasdaq Composite advanced 12.4%, and the S&P 500 added 9.1% during the month.
The rapid turnaround in the markets was triggered by expectations that the Fed could become more dovish in the near-term. The US entered into a technical recession in Q2, with GDP readings showing that the US economy contracted by 0.9% in Q2, following a contraction of 1.6% in Q1. Investors bet that the Fed would have to be less aggressive with its rate hikes in order to avoid pushing the economy into a recession, which is why the markets rallied to this seemingly negative news.
Better than expected corporate earnings also bolstered investor sentiment. AMZN rallied more than 10%, and AAPL added more than 3% after both companies reported stronger-than-expected results. However, not all results were as rosy. ROKU sank more than 20% and INTC lost more than 8% on worse-than-expected earnings. In general, earnings results were mixed across the board, but there was enough strength to fuel positive sentiment.
Whether or not the current rally is a bear market rally or something more permanent remains to be seen. The fact of the matter is that June’s inflation rate (PCE) hit 6.8%, which is its highest level since January 1982. The market outlook will continue to depend on how the Fed responds to record levels of inflation. On the one hand, the Fed must raise rates in order to tame inflation. On the other hand, the Fed is trying to avoid causing a recession with its monetary tightening policies.
During July, the Eta strategy gained 5.9%, moderately trailing the S&P 500, which gained 9.1%. YTD, Eta has lost 6.8%, significantly outperforming the S&P 500, which has lost 13.3%. Since inception, Eta continues to significantly outperform the S&P 500 on both an absolute and risk-adjusted basis.
During July, Eta’s average exposure increased from ~45% in the first half of the month to ~70% in the second half. This shows that our AI took a measured approach to exposure. It sought to participate in the latest rally while still providing downside protection during these volatile times. Looking forward, we continue to expect the markets to be volatile as it searches for a more permanent direction.