Stocks Finish Higher to Start Second Half

Despite the modest gains, the stock market doesn’t yet look like it will leave behind the concerns that made the first six months of 2022 the worst in decades. But investors are sifting through the rubble of recent selloffs for reasons for hope.

In terms of the latest economic data, the ISM manufacturing index fell to a reading of 53 in June from 56.1 in May, below economists’ forecast and marking its lowest level since June 2020.

At the heart of investor concerns is the fact that inflation remains at a multidecade high, which makes the Federal Reserve poised to continue aggressively boosting interest rates and tightening monetary policy. The risk is that raising borrowing costs to dent economic demand could spur a recession.

Anticipation of higher rates and an economic slowdown have spurred a selloff in stocks this year, with the S&P 500 down more than 20% in 2022 and the Nasdaq 30% lower. It’s unlikely that there will be a significant rally in stocks until there is more certainty over inflation and the Fed’s pathway.

“Bad [first halves) for equities have tended to be followed by much better [second halves]. But with increasing warnings that a recession is round the corner, it isn’t so obvious where things are headed this time round,” said Jim Reid, a strategist at Deutsche Bank. On Thursday, core personal consumption expenditure (PCE) inflation, which is the Fed’s preferred inflation metric, rose 4.7% year-over-year in May, only a slight dip from the previous month.

According to Dow Jones Market Data, the record gain for S&P 500 in the first half of any year was 58.35% in 1933; that came after the record gain for a second half, of 55.53%, in 1932.

“Fears rattling financial markets show little sign of subsiding, with investors spooked about signs of looming recessions, while inflation stays stubbornly high,” said Susannah Streeter, an analyst at broker Hargreaves Lansdown. “There are concerns that … the Federal Reserve and other central banks will have to step on the accelerator of interest rate hikes to bring red hot prices under control.”

Overseas, the pan-European

Stoxx 600
was flat, and Tokyo’s

Nikkei 225
lost 1.7%.

One of the latest signs of fear over the global economic outlook is copper prices. Continuous-contract futures for the metal traded in New York shed more than 3% to below $3.60 per pound—the lowest levels since January 2021.

One of the most versatile and important metals, copper is used extensively in a range of manufacturing processes ranging from electrical wire to pipes. Known as “Doctor Copper,” the price of the metal is considered a bellwether for global economic outlook.

In the cryptocurrency space, Bitcoin was up slightly over the past 24 hours, but continued to trade below the key $20,000 mark. It rallied more than 10% in the late hours of Thursday, jumping from $18,700 to $20,700, before falling back.

Still, that’s not the entire story, given that stocks were able to stage a comeback.

“Although negative earnings revisions are increasing, overall expectations for the second quarter remain surprisingly solid despite ongoing constraints affecting corporate operating margins,” notes Quincy Krosby, Chief Equity Strategist for LPL Financial. “With two quarters of consecutive negative economic growth, a Federal Reserve seemingly intent on aggressive tightening regardless of the economic and market backdrop, and signals of a more marked slowdown, an earnings season that surprises to the upside rather than the expected downside, could help restore a semblance of stability in markets.”

There’s also the fact that for all the talk of recession, it’s not written in stone. Models from Bloomberg and the New York Federal Reserve show a 0% and a 4.1% chance, respectively, of a recession in the coming 12 months, notes Leuthold Group’s Chief Investment Strategist Jim Paulsen.

On the latter, the lack of an inverted yield curve is a positive sign; Paulsen argues an inversion is unlikely until year end or in 2023, even as the Federal Reserve raises interest rates.

“More probable, in our view, is that the Fed is poised to soon pause its tightening campaign after a rate hike to around 2.5%,” he writes. “Real economic growth has already slowed significantly, inflation is showing more and more signs of abating, the rout in bond yields has stalled, and bond-market breakeven rates are collapsing. By this fall, Fed tightening may take a breather, leaving a positively sloped yield curve in place to support an ongoing economic expansion.”

If nothing else, investors can breathe easier over the long weekend, with more time to ponder how soft a landing the market might expect.

Here are some stocks on the move Friday:

Kohl’s

 (ticker: KSS) stock slid 19.6% after the department store chain said it had ended talks to be acquired by 

Franchise Group

 (FRG). Shares of 

Franchise Group

 fell 7.5%.

Shares of 

Micron Technology

 (MU) were down 3% after the maker of memory chips said fiscal fourth-quarter results will come up short of analysts’ estimates.

General Motors

(GM) stock climbed 1.4%. The auto maker warned that its second-quarter profits would be hurt by supply chain woes, particularly for semiconductor shipments.

Li Auto

 (LI) stock dropped 1.6%, 

NIO

 (NIO) slipped 1.7% and 

XPeng

 (XPEV) fell 4.6%. Deliveries for all three electric vehicle companies looked strong in June as production and demand for EVs in China rebounded.

(Angela Palumbo contributed to this article.)

Write to Jack Denton at jack.denton@dowjones.com and Teresa Rivas at teresa.rivas@barrons.com