Scottish Mortgage stars in best July for Wall Street since Great Depression

A whole bunch of beat-up stocks had a much better July, and not just in the US. It remains to be seen whether this is the real deal or just another bear market rally.

Portfolios are on firmer ground at the start of August after the best month for financial markets since Covid vaccine breakthroughs helped some battered stocks to rebound by a fifth.

Big risers included Scottish Mortgage (LSE:SMT) Investment Trust and Spirax-Sarco Engineering (LSE:SPX), although their blue-chip shares still ended July down by at least a quarter in the year to date.

The upturn in risk appetite was driven by hopes of a pivot on Federal Reserve interest rate policy due to softening economic conditions and potential peak in inflationary factors. The Fed has hiked by 75 basis points at its two most recent meetings, but investors are now hopeful of a less aggressive pace of tightening and even the potential for rate cuts next year.

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Wall Street led the rebound as the tech-focused Nasdaq jumped more than 12% and the S&P 500 by 9% in its best July performance since the Great Depression. Their surprise progress was well ahead of the 4% rise seen by the commodities-driven FTSE 100 index as oil prices and metals prices retreated during the month.

The FTSE 250 index was the UK’s best performing benchmark in July, rising by 8% as robust updates also meant Sports Direct owner Frasers Group (LSE:FRAS), corporate merchandise firm 4imprint (LSE:FOUR) and facilities management firm MITIE (LSE:MTO) gained by at least a third. All three are now trading significantly above where they started the year.

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Several other high-profile stocks have taken a big bite out of their deficit for the year, with cyber security firm Darktrace (LSE:DARK) now down by 10% in 2022 and precision measurement and process control firm Renishaw (LSE:RSW) 12% lower. Fast-fashion business ASOS (LSE:ASC) rose 24% in July but was still 57% weaker in the year-to-date.

City analysts share their views on stock performance

Looking across the 38 non-currency assets in its coverage, Deutsche Bank said 29 posted a monthly gain in July – the highest percentage since November 2020. However, it warns that the year is still on track to be worse than the 2008 financial crisis as only five assets are currently seeing a year-to-date gain.

UBS Global Wealth Management has advised investors against reading too much into July’s more positive picture, warning that markets may stay choppy in the coming months. It points out that the next Federal Reserve meeting is on 20/21 September, with two months of economic data likely to give markets plenty to digest before then.

Bank of America today said it regards the current improvement as a bear market rally, which it points out has occurred 1.5 times on average per bear market since 1929.

It has maintained its year-end target of 3,600 for the S&P 500, compared with today’s level of more than 4,000 after a 13% rise from a low point seen on 16 June.

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Two of the worst performing US sectors year-to-date were the best performers in July, with consumer discretionary up 18.9% and technology 13.5% higher. However, recent earnings suggest continued challenges ahead as Bank of America notes that the number of mentions of weak demand on earnings calls has soared to a record high for consumer stocks.

More than two-thirds of S&P 500 companies have now reported their figures, with earnings per share for the second quarter showing a solid 3% beat while guidance for the second half has been revised down by 2% since 1 July.

Bank of America added: “Overall, results were better than feared, especially with more above-consensus guidance than below, which was the biggest positive surprise. But we are still in the very early innings of downturn and estimate cuts.”

UBS chief investment officer Mark Haefele believes it’s important to stay invested and avoid positioning for a single scenario. He prefers value and quality income over growth stocks, believing that growth names are still expensive in relative terms and are negatively correlated to rising real rates.

He added: “We have a preference for UK and Australian equities. Within sectors, we remain most preferred on global energy and healthcare stocks.”