Is the investment climate shifting toward a more positive outlook? My short answer: very likely. Recent market behavior and central bank signals suggest the worst may already be priced in, and investors are beginning to respond with greater confidence.
In mid-July I began to notice signs that markets were turning a corner. Companies were reporting second-quarter earnings that, while disappointing relative to analysts’ forecasts, did not trigger the mass sell-offs you’d normally expect in a high-volatility environment. That’s notable given the headwinds markets faced at the time: rapidly rising interest rates, historically high inflation, and warning signs about economic activity—such as inverted yield curves and shrinking GDP.
Markets didn’t ignore weak earnings, but reactions were muted. Instead of steep declines, many stocks fell only modestly—typically between 1% and 5%. A striking example was JP Morgan Chase: when it disclosed a 28% drop in earnings on July 14, 2022—driven largely by higher loan-loss provisions and a pause on buybacks—its share price fell less than 5%. Had those results been announced a few months earlier, the drop would likely have been far greater.
That restrained response was my first sign that investors had largely priced in downside risk. Unless a new, unforeseen shock occurs—another major geopolitical conflict or a global health crisis—markets already reflected many negative scenarios. In other words, stock prices appeared to be close to a trough, leaving the path of least resistance pointing upward rather than further down.
What central banks are signalling
More recently, the U.S. Federal Reserve has hinted that the pace of rate hikes may moderate. After a series of aggressive increases—25 basis points in March, 50 in May, and 75 in both June and July—the Fed’s tone shifted toward smaller, more measured moves. That pivot produced a meaningful market rebound: July 2022 was one of the strongest months for investors since 2020, reversing the steep losses seen in June.
The Bank of Canada has been a step behind in signaling a slowdown, continuing its own tightening campaign with several rate increases this year, including a larger move in July. Nonetheless, when central banks show progress in taming inflation, markets tend to respond positively because it reduces uncertainty about future monetary policy and the eventual return to lower rates.
Is the U.S. in recession, and does it even matter?
There has been debate about whether the U.S. economy is in a recession. By the strict technical definition—two consecutive quarters of negative GDP growth—the answer may be yes. Politicians and commentators will disagree on labels, but the label itself is less important for investors than the market implications.
From an investment standpoint, the relationship between recessions and market returns is not straightforward: markets fall, then rise, and vice versa. Savvy investors use both down markets and up markets as opportunities. When prices are depressed, it’s a chance to buy quality assets at attractive valuations; when markets run ahead, it can be a time to lock in gains.
Recent weeks illustrated this dynamic: following a prolonged sell-off that left stocks at multi-year lows, buyers stepped in. Historically, some of the strongest market days and months follow the worst sell-offs. That recovery pattern repeated itself recently, underscoring the value of staying invested and disciplined.
Is the current upswing a short-lived rally or a sustainable recovery?
Investors naturally want to know whether the recent optimism will persist. While no one can predict the future with certainty, the practical approach for long-term investors is the same regardless: take advantage of upward moves and maintain a strategy for the inevitable downturns. Riding shorter rallies can compound long-term returns because you’re participating when markets recover.
Counterintuitively, slower economic growth can be constructive for markets. Poor GDP or weaker employment data may signal that monetary tightening is starting to work, increasing the chances that central banks will ease off further rate hikes. That dynamic often marks a turning point for markets and can set the stage for renewed gains.
Final thoughts for investors
My key advice: don’t panic and remain invested. It’s a misconception that getting older means you should exit the market to avoid volatility. As long as you aren’t withdrawing funds, staying invested allows your portfolio to benefit from recoveries over time.
Have a plan and use market swings to your advantage. Over the past several months I’ve been rebalancing client portfolios with this principle in mind—buying high-quality companies at discounts and trimming positions I expect to underperform going forward. In my recent trades, I increased exposure to select technology stocks, which had been hit hardest by investor fear but are often the quickest to rebound when sentiment improves.
Although markets have advanced substantially, I still see attractive opportunities for disciplined investors. Volatility creates bargains; the important thing is to act according to a thoughtful plan rather than emotion.
Allan Small is the senior investment advisor at the Allan Small Financial Group with iA Private Wealth (allansmall.com) and the author of How To Profit When Investors Are Scared. He can be reached at [email protected].
Read more from Allan Small:
- How to stay invested and pick up good quality companies—on the cheap
- What fast-rising interest, inflation and bond rates mean for investors
- Hedging against inflation with dividend-paying stocks
- The meaning of market swings—and why you should care