Despite economic gloom deepening during July, risk assets rallied strongly with US small caps and tech stocks topping the performance charts.
According to FE Analytics, with a return of 9.6% North American US Smaller Companies topped the sector rankings in July, followed by Technology and Technology Innovations which posted an 8.26% gain.
Ben Yearsley, director at Shore Financial Planning, said the return to favour of growth stocks in July appears to be the “paradoxical stage” of the investment cycle that investors are facing as we move deeper into the second half of 2022.
“As economic growth weakens investors are betting that central banks may be more reluctant to aggressively increase interest rates and slower economic activity will help dampen inflationary pressures,” he said.
Yearsley said this was highlighted at the end of July with US stock markets rallying strongly despite the announcement of a second successive quarter of economic contraction in the US economy.
Don’t have all your eggs in one basket
To illustrate the turnaround, versus a 7.5% fall in June, the S&P 500 recorded a 9.19% rise in July. This translated into strong returns for investors in US funds, with the IA North America sector the fourth best performer in July, with the average fund up 7.78%.
“As seems common these days, bad news is good for markets with Nasdaq having the best one day rise since November 2020 on the back of the Fed’s second 0.75% hike in a row,” said Yearsley.
Indeed, with the exception of China – in which the Hang Song Index fell 7.32% – Yearsley noted that most markets did well in July. In addition to the more growth-orientated regions, value markets also did well with the FTSE 100 up 3.67%.
“Sterling’s weakness over the course of 2022 has been helpful to FTSE earnings with many companies highlighting the currency impact,” he said.
“At the same time, old economy stalwarts such as banking and oil were releasing good profit numbers and bonds made a recovery,” he added. “With so much uncertainty, portfolio balance is crucial – don’t have all your eggs in one basket.”