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Investors and economists have breathed a sigh of relief as new inflation data suggest that price pressures are easing. While the prices of everyday goods are still significantly higher than a year ago, some of the underlying trends are beginning to reverse. This is largely in line with our Inflation Inflection note earlier this year that inflation would likely start to ease come the summer months. Stocks have rallied as markets price in hopes the Fed will pivot soon. The S&P 500 and the Nasdaq have now gained 16.7% and 22.6%, respectively, since the middle of June when oil prices peaked and the Fed began accelerating its rate hikes to fight inflation. But we’re not chasing the rally. Why? We view market expectations for a dovish pivot as premature and that a pivot will come later as the Fed is now responding to pressure to tame inflation.

As the economy slows, some investors are worried about the possibility of a recession and the long-term consequences of ever-growing government debt. These concerns are timely due to recent economic data and policy decisions, including the Inflation Reduction Act making its way through Congress.

Last week's report on the country's Gross Domestic Product for the second quarter confirmed that the economy shrank in the year's first half, a fact that some investors and economists had already suspected. Broad-based inflation, rising energy prices, higher interest rates, and a strong dollar dragged on growth for the second consecutive quarter.

As we enter the second half of the year, investors continue to grapple with inflation, higher interest rates, the Fed, and the prospect of a recession. If historical bear markets are any indication, investors' decisions during this period will have long-lasting effects on their portfolios.