There has been no shortage of news making developments this summer in the financial markets. So many, in fact, that we can’t cover it all in one blog post. We will have another post soon.

From January until mid-June stocks and bonds had been bloodied by rising interest rates and 40-year highs in inflation. Our message to clients during that time was that the first half of the year would be particularly challenging, in large part due to the Fed just beginning their rate hiking cycle and inflation continuing to surge higher with no peak in sight. We believed once the second half arrived, the prospects for inflation peaking would improve and the massive move higher in interest rates would start to moderate.

Since late June both stocks and bonds have had their best rally of the year. Investors have been heartened by the yield on the 10-year treasury bond declining from 3.49% to 2.77% as the chart shows.

In a post in June we referenced that the University of Michigan Consumer Sentiment survey was the lowest on record. A major contributor to the pessimism was the significant increase in gas prices. However, consumers have had a reason to smile as gas prices have declined by $.95/gallon since June 13th. This decline has led to a sharp decrease in consumers’ inflation expectations in a report issued yesterday by the NY Fed. This is a very big deal for the Fed. If they can keep higher inflation expectations from becoming embedded in the minds of consumers it will greatly aid their efforts to bring inflation back down to their target.

It isn’t just gasoline prices that have declined since mid-June. There have been declines up to 38% in commodities ranging from copper to wheat. It will take time for these price declines to show up in the prices of products consumers purchase, but make no mistake, this is good news for consumers.

Now obviously there is more to inflation than just gas prices or commodity prices. Take housing, recent data show that both existing and new home sales have significantly cooled over the last 60 days. Last month mortage demand reached it’s lowest level in 22 years. Also, homebuilders such as Lennar, Pulte and D.R. Horton have reported a sharp uptick in cancellations. This is all good news to the Fed as they have called out housing as an area where prices rose too high, too fast.

Now there are two sources of inflation where we are still waiting for signs of a cooling. That would be in wages and in rent prices. We will address wages in a video next week.

We also will address:

The July CPI report (which will be released tomorrow morning by the way)
Our key takeaways from 2nd quarter earnings season, which is winding down
The challenges stocks will face in coming months as markets try to build on the recent rally

After you read this be sure to keep your eye out for our next video. You won’t want to miss it.

Decline in Bond Rates & Gas Prices Fuel Summer Rally in Stocks