Last week, the stock markets around the world fell hard. Besides the U.S. markets, for example, the speculation fever in Japan gave way and the entirety of the 2024 Nikkei market gains evaporated. A combination of waiting for a rate cut from the Federal Reserve, big tech companies’ disappointing second-quarter 2024 financial results, and a weak labor market meant a market meltdown the size of which we have not experienced since the deep correction of 2022.
Is the much ballyhooed “Goldilocks” economy turning out to be a debt-induced recession instead? Too early to tell, but with two out of three Americans living paycheck to paycheck, layoffs and more austerity may just be the straw that breaks the camel’s back in many cases for Americans. If we must “hunker down” further, what choices can we make depending upon our individual financial situations?
Economic Choices Made More Difficult
The table above refers to broad household spending categories. To add some detail to these categories, we need to consider each item separately:
Stock Market Correction
Last Friday’s stock-market pullback plunged the tech-heavy Nasdaq into correction territory, which is defined as a drop of at least 10 percent, but not more than 20 percent, from a recent high, according to Dow Jones Market Data. A bear market is under way when we experience a pullback of at least 20 percent. Investors seeking to protect their portfolio investments from an economic slowdown should consider rotating into the stocks that are categorized as defensive and moving out of the Mega cap technology names.
Defensive stocks usually provide consistent dividends along with stable earnings regardless of the state of the economy. However, analysts believe rotating into “safer stock sectors” likely offers limited benefits given the broader market’s volatility we may experience throughout the rest of the summer.
Recession Fears
Recession-related concerns that the Fed could have made a policy error led investors flocking to safe-haven assets such as U.S. Treasury bonds and gold. The yield on the two-year Treasury fell on Friday by 29.2 basis points, to 3.87 percent (bond prices and yields move in opposite directions), and settled at the lowest level since May 2023, according to Dow Jones Market Data.
It is possible that investors overreacted to this news of softer-than-expected economic data, and that the selloff this week may have been overdone. The U.S. economy added just 114,000 jobs last month, while the unemployment rate rose from 4.1 percent in June to 4.3 percent in July, pitching to the highest level in nearly three years, the Bureau of Labor Statistics reported.
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It was that rise in the unemployment rate that triggered what is called the Sahm Rule, signaling the likely start of a recession. When the current three-month moving average in the unemployment rate exceeds the lowest three-month moving average over the past year by half a percentage point or more, this recession indicator flashes red.
Slow but Steady Economic Softness Continues
Since May, economic data has been surprising to the downside, according to Citi’s Economic Surprise Index. Signs of America’s slowdown have been coming before the Fed’s last meeting where members held interest rates unchanged. Full-time household employment started weakening near the end of 2023, credit card delinquencies have steadily risen above pre-pandemic levels since and go up further every month.
Leading economic indicators appear troubling too. The ISM manufacturing New Orders Index, for example, is in contraction, and it has been a reliable signal forecasting recession in the past. Jobless claims rose to an 11-month high, small businesses have been cutting back on their hiring plans, and consumer-facing companies have been recording earnings misses.
Should We Prepare for Recession?
Recession may seem unlikely at the present time, but our economy doesn’t slow in a linear fashion. Loss of economic momentum, which has been happening for an extended period—and is deeper than many appreciate—can become a self-reinforcing downward spiral. Joblessness, delinquencies, bankruptcies, and even more difficult financial circumstances for the average American can spike and worsen. The recession warnings are flashing—they should not be taken lightly.
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