The beginning of August was one of the worst three day stretches for the stock market in recent history:
Thursday, August 1: Market down -1.37%
Friday, August 2: Market down -1.84%
Monday, August 5: Market down -3.00%
In a matter of three days some of our clients saw their portfolio drop 6%. To put it into real dollar terms if you started with $1,000,000 Wednesday evening, you were down to $940,000 by Monday evening.
Without proper context, that can be very alarming (even with proper context that could still be alarming). So, what caused the market to take a three-day dive?
There isn’t always a clear and apparent reason for daily fluctuations in the stock market, but this time around there was.
Near the end of the week the Bureau of Labor Statistics released their monthly “Employment Situation” report.
Unemployment rose from 4.1% in June to 4.3% in July representing an additional 352,000 people without a job.
That was higher than expected and immediately sparked the question on everyone’s mind, “is the economy about to go through a recession?”
Not only can I not answer that question with any type of certainty. Some of the smartest financial minds in the world who are paid to predict what our economy will do can’t answer that question with any type of certainty.
However, I can give you some context and my opinion on what’s happening.
First, the Federal Reserve has kept interest rates higher to cool off the economy. A recession is bad, but persistent inflation and higher prices is also bad.
The Fed Chair, Jerome Powell, has said it himself, higher interest rates typically leads to higher unemployment and that’s a trade-off we have to make to bring inflation down. In other words, short-term pain for better long-term prosperity.
Expectations were already set for what happened this month with the unemployment rate ticking up.
Furthermore, now that inflation has come down, and unemployment has slightly gone up, the prospects of the Federal Reserve cutting interest rates this September is very good.
That means mortgage rates will drop, auto loan rates will drop, the economy will be stimulated and that’s good for the stock market.
In my opinion, what happened from Thursday to Monday was a huge overreaction. Let me end with a few statistics to give you some context on where the economy is now:
- Over the last 10 years, the unemployment rate has ranged from 3.4% to 14.7%. The average rate is 4.75%. We’re currently at 4.30% which is under the average (and for unemployment that’s a good thing!).
- Over the last 10 years, US consumers spending on retail and food has averaged 206 billion (adjusted for inflation), we’re currently at 225 billion, well over the average.
- Over the last 10 years, new home construction has averaged 1.35 million/year, with interest rates as high as they are, you’d think we’d be well below the average, however, it’s only slightly lower than the average at 1.32 million/year. You can bet that as soon as interest rates drop, new home construction will pop.
Don’t get me wrong, not everything is rosy, and the narrative can change quick, but bottom line, by most objective measures, the US economy is healthy and in a good spot.
Remember, almost every year the stock market goes through a 10% correction, even in the really good years. The news cycle is quick and with proper context we can determine if and when it makes sense to adjust the portfolio.