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As we typically see in stock markets and had written about last month, when investor sentiment gets as bearish as it got, expectations for earnings plummet and cash levels rise to cyclical highs, stocks do tend to find a bottom, at least for the short term. From mid-June to mid-July, the S&P500 rallied over 9% and the ‘technology heavy’ Nasdaq Index jumped over 13%. Underpinning that short-term recovery in stocks was a decline in bond yields, with the 10-year U.S. Treasuries falling below 2.80%, well under its mid-June peak near 3.50%. The conclusion from this is that investors have started to price in a fairly severe economic downturn, which is why there was a switch back to the ‘growth’ stocks that tend to do better in a period of slower growth and lower interest rates. That also dovetails with the fact that the more ‘cyclically-oriented’ sector such as industrials, metals and energy all sold off sharply in the June downturn. Investors then had to focus on second quarter earnings reports and forward guidance to either confirm the recession view or indicate a less severe slowdown. (more…)