Why Stocks Took a July Vacay From Fundamentals

July was an illustration of the adage that “the market is not the economy.” US stocks had their best month in two years while the economy received discouraging news about both growth and inflation. But rather than illustrating another adage — “bad news is good news” — the contrast is a reminder that economic fundamentals are one of three main drivers of asset prices, and their influence varies over time.

With a return of 12% in July alone, the Nasdaq Composite Index recovered more than a third of the loss incurred in the brutal first half of 2022. The other, less volatile indexes also had a strong month, reducing the year-to-date losses to 10% and 13% for the Dow Jones Industrial Average and the S&P 500 Index respectively.

The good news did not extend to the economy. On the contrary in fact.

July was full of worrisome news about sky-high inflation (9.1% as measured by the consumer price index for June), negative GDP growth (-0.9% for the second quarter), a drop in real incomes and diminished household savings. Company after company warned that the damaging impact of inflation on their costs was now increasingly accompanied by worries about revenue as rising prices destroyed demand for some goods and even services, though less so for now.