Investors are starting to piece together the troubling state of the economy. Despite a continuous stream of poor economic data, the Federal Reserve has so far refrained from cutting interest rates. This scenario has historical precedence, and it rarely ends well.
The adage "he who hesitates is lost" seems particularly apt here; the Federal Reserve's delay may lead to substantial economic hardship in the coming months.
Stocks fell sharply last week as a much weaker-than-expected July jobs report stoked fears of an impending recession in the U.S. The broad market index dipped 1.84 percent to end at 5,346.56. The Nasdaq Composite lost 2.43 percent, closing at 16,776.16, which marked a more than 10 percent decline from its latest all-time high. The Dow Jones Industrial Average dropped 610.71 points, or 1.51 percent, to finish at 39,737.26, having been down as much as 989 points during its session low.
The market's downturn was driven by a sharp slowdown in job growth, with the Labor Department reporting that nonfarm payrolls rose by only 114,000 in July. This was a significant decline from the 179,000 jobs added in June and well below the 185,000 forecast by economists polled by Dow Jones. Meanwhile, the U.S. unemployment rate climbed to 4.3 percent, the highest since October 2021.
In response, the ten-year Treasury yield fell to its lowest point since December, as investors sought the safety of bonds amidst concerns that the Federal Reserve may have erred by maintaining current interest rates.
Throughout the day, several major tech stocks suffered substantial losses. Amazon's second-quarter results raised investor concerns over Big Tech's substantial AI-related capital expenditures, leading to an 8.8 percent drop after the company missed revenue estimates and issued a lackluster forecast. Intel plummeted 26 percent following an announcement of layoffs and weak guidance. Nvidia also declined 1.8 percent, after experiencing a 6 percent loss the previous day.
The Nasdaq has now entered correction territory, down over 10 percent from its record high. The Dow and the S&P 500 are also down 3.9 percent and 5.7 percent from their respective record highs.
Many still anticipate a rate cut from the Federal Reserve in September. Wall Street's narrative is evolving; traders have long bet on a rate cut in September, and Fed Chair Jerome Powell indicated this possibility last Wednesday.
This anticipated rate cut, expected in six weeks, had been factored into stock prices, which had been rising in anticipation. Rate cuts typically boost stocks by lowering borrowing costs for companies, potentially increasing profits.
However, fear is beginning to take hold, as there are rising concerns that the Fed may not be acting swiftly enough to sustain the U.S. job market.
Claudia Sahm, a prominent economist, has expressed deep concern over the Fed's inaction. Given the troubling data seen in recent days, she questions what the Fed is waiting for.
As the Fed potentially prepares for interest rate reductions, some market segments are growing impatient.
Jeffrey Gundlach, CEO of DoubleLine, has used stronger language, suggesting that the Fed is risking a recession by not taking action. He believes the Fed's steadfast stance on interest rates is endangering economic stability.
Several indicators suggest the economy may already be in the early stages of a recession. The Institute for Supply Management (ISM) Manufacturing PMI registered 46.8 percent last month, indicating a faster contraction in industry economic activity compared to June's 48.5 percent.
Additionally, initial unemployment benefit applications surged to the highest level in nearly a year. Recent data showed 249,000 first-time unemployment filings, the most since last August. Continuing claims, representing those who have received jobless benefits for at least a week, rose to 1.877 million, the highest since November 2021.
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Unfortunately, more layoffs are on the horizon as numerous companies across the nation face severe difficulties. Last week, a furniture store that survived the COVID pandemic, the Great Recession, and the Great Depression, announced the closure of all 380 of its stores and filed for bankruptcy. Badcock Home Furniture and More, with locations across the South, launched a "going out of business" sale last Tuesday. The company, acquired in 2023 by Texas-based Conn’s, filed for bankruptcy last week.
In total, U.S. retailers have announced nearly 2,600 store closures in 2024. If the U.S. economy is in such "good condition" as some media outlets suggest, why is this happening?
Red flags are emerging daily in 2024, and last week's stock market performance is just the beginning of what could be a much worse situation.
As conditions deteriorate in the second half of 2024 and beyond, our leaders may attempt to stabilize the situation by continuing their current policies. However, this will likely exacerbate the cost of living crisis and worsen our long-term problems, which are rapidly becoming short-term issues.
The entire system is trembling, and the bubble economy is edging toward collapse. We are at the leading edge of an economic storm that will intensify significantly in the second half of 2024. The outlook for 2025 is even bleaker.
What Should We Do?
In the short term, protect your assets and build a substantial emergency fund to ensure you can cover all your expenses. In the long run, brace for what might be the most challenging period in our history. Our leaders' poor decisions over the years are now leading to consequences that will soon become evident to everyone.