The risk-on trade is back in style, but I’m not ready to sing “happy days are here again.” Sure, the evidence suggests that the bear market has bottomed, but we’re likely to get sharp dips during the remainder of this year as mixed economic messages whipsaw investors.

Wall Street in recent days has shrugged off downbeat data on U.S. housing and China’s economy. But the weak numbers on those two fronts are a reminder that, despite the powerful equity rally this summer, we’re not out of the woods yet.

Let’s start with the United States. We got a disappointing reading of the U.S. housing market Monday, yet U.S. stocks closed higher that day, extending their big gains from last week.

Before Tuesday’s opening bell, Walmart (NYSE: WMT) released second-quarter operating results that exceeded consensus expectations for earnings and revenue. The giant retailer also reaffirmed its guidance for the rest of this year.

Investors took heart from Walmart’s performance and saw it as a sign that the consumer, although cutting back on discretionary purchases, was hanging tough amid inflation.

After the opening bell Tuesday, the major U.S. stock market indices were trading in the green. Equities have been on a four-week winning streak, with the S&P 500 currently down less than 10% year to date.

It’s increasingly less likely that we’re witnessing a “bear market rally” that’s destined to implode. But volatility is here to stay. The next crucial data release will be Wednesday, for retail sales.

Investors undeterred (so far) by bad news…

Data released Monday showed that home builders were negative in their assessments of the housing market for the first time since May 2020. The National Association of Home Builders/Wells Fargo Housing Market Index fell from 55 in July to 49 in August.

The drop in August represents the eighth consecutive monthly decline and was well below consensus estimates of 55. A reading above 50 is considered positive.

The current sales subindex dropped 7 points to 57; buyer traffic fell to 32 from 37; and sales expectations for the next six months declined by 2 points to 49. The main culprits for the gloomy assessments were higher building costs and tighter monetary policy from the Federal Reserve.

The report did convey a silver lining: “As signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

But more bad news on housing came Tuesday. The U.S. Census Bureau reported that single-family housing starts plunged 10.1% in July to an annual rate of 916,000, aligning with Monday’s dreary NAHB/Wells Fargo report. Overall starts were down 9.6% from last month and 8.1% from July 2021 (see chart).

Despite the disappointing news on housing, positive jobs and inflation data have added impetus to the equity market rally that started two months ago. The S&P 500 has now retraced more than 50% of its 2022 decline.

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Investors also weren’t fazed by the bad news from China. New data on Monday published by China’s National Bureau of Statistics showed that China’s economic slowdown worsened in July, largely because of a real estate crisis and persistent COVID lockdowns.

China’s central bank unexpectedly slashed interest rates in response. The People’s Bank of China (PBOC) cut the main rate at which it provides short-term liquidity to banks, from 2.1% to 2.0%. The PBOC also cut the rate of its one-year lending facility from 2.85% to 2.75%. However, those moves aren’t likely to be enough to fuel a turnaround.

For the month of July in China, retail sales, industrial output and investment all substantially slowed, falling well short of consensus estimates.

China’s retail sales in July increased 2.7% from a year ago, versus June’s 3.1% growth. Industrial production grew 3.8% in July from a year earlier, down from the 3.9% growth in June. Property investment by developers contracted 6.4% in the first seven months of this year. New home prices in 70 major Chinese cities plunged for the 11th straight month.

The global growth engine sputters…

China is the world’s engine of economic growth. The latest bad economic news out of China stoked fears of global recession and put further pressure on commodities prices, with the price of crude oil falling below $90 per barrel.

Indeed, the situation in Red China, Inc. could be even worse than it appears. China’s lack of transparency and past accounting scandals continue to cast doubts on the real health of the nation’s economy.

Last Friday, five of China’s biggest U.S.-listed, state-owned giants, valued at a collective $318 billion, announced they would delist from the New York Stock Exchange (NYSE), as Washington and Beijing continue to squabble over allowing American regulators to audit Chinese companies.

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John Persinos is the editorial director of Investing Daily.

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