The first six months of 2022 have been extremely painful for equity investors as most major indices have experienced a downward spiral in this period. In fact, the stock market may close out its worst first half in several decades in the upcoming week which has set the stage for an era of volatility and uncertainty.

However, indices may now gain momentum in the next two weeks due to an oversold market. Several fund managers also rebalance their portfolios and shift their investments to take advantage of depressed valuations and changing market conditions, towards the end of a quarter.

According to JPMorgan (NYSE: JPM), the rebalancing of portfolios might drive stocks higher by 7% in the next week, given the S&ampP 500 index is down 13.7% in Q2 and has declined almost 18% year-to-date.

Towards the end of Q1, the S&ampP 500 index slumped by 10% but the last week of the quarter saw a rally of 7%. JPMorgan emphasized that cash balances are at record levels in a period of low liquidity. Add in an oversold market and substantial shorting activity to the mix and we can see why the investment bank is optimistic about a short-term rally.

Even if the equity markets trade higher in the last week of June, the third quarter has been among the worst-performing ones historically due to uncertainties associated with mid-term elections. Data from CFRA suggests the S&ampP 500 has declined by 0.5% on average in the second year of a presidential term after a 1.9% decline in Q2.

If the markets remain at similar levels at the end of Q2, it would mark the worst first six months for equities since 1970.

 

What to expect in the week ahead?

In the upcoming week, there are a few key economic reports as well as corporate earnings which will impact the market, especially if companies miss estimates or report tepid guidance for the upcoming months.

The personal consumption expenditures data will be released on Thursday. This data includes the PCE deflator reading and is closely watched by the Fed. Additionally, ISM Manufacturing data will be released on Friday while consumer confidence and S&ampP/Case-Shiller home price data will be released on Tuesday.

The key catalyst for stock prices for the second half of 2022 will be the upcoming earnings season. The major banks will report earnings between July 14 and 15 which means earnings season takes off in the second week of the next month. So, equity markets will be extremely volatile in the following month especially if companies report weaker-than-expected forecasts.

 

Interest rates and the S&ampP 500

While stock indices inched higher on Friday, bond yields continue to recover from a steep decline. The 10-year Treasury yield touched a high of 3.48% on June 14 and stood at 3% last Thursday. It ended at 3.13% on June 24. Comparatively, the S&ampP 500 rose 6.4% to close the week at 3,911.

In addition to corporate earnings, investors will be waiting to see if inflation will continue to move leading to higher interest rate hikes which is a perfect recipe for an economic recession. 

There is a chance for the Fed to maintain a hawkish stance and increase yields by 0.75% in July after a similar hike earlier this month.

In a CNBC interview, George Goncalves, the head of U.S. macro strategy at MUFG explained, “It’s a narrative in overdrive. You go from inflation fears, and a 75 basis point hike... to only realize the more the Fed hikes, eventually they’re going to tip us into recession. All this in a matter of a week.”

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