On Monday, August 5, we saw a big selloff with Nasdaq falling more than 6% and S&P dropping 4.25%. Overseas, the Japanese index, the Nikkei 225 dropped by more than 12%. While the Nikkei has rebounded a bit, and the US markets had a brief rally on Tuesday, August 6, volatility has increased since the poor jobs report released earlier this month.
After two years of financial tightening from the Fed, the labor market is showing pronounced signs of cracking. A recession indicator known as the Sahm Rule states that, “…the early stages of recession are signaled when the three-month average unemployment rate moves above the lowest three-month moving average unemployment rate over the last 12 months by half a percentage point or more.”[i] This measurement getting triggered with the last jobs report indicates that the jobless rate is rising quickly, which is often indicative of a recession. That said the namesake of the rule itself doesn’t think this trigger is as useful in our current economy with the post-pandemic labor supply dynamics[ii] despite being generally concerned about the trajectory of the US economy.
Despite weakening jobs numbers, the Fed has chosen to keep rates steady for another month. Although Powell is no stranger to criticism, scrutiny is growing on the Federal Reserve’s reluctance to cut rates. The rate hikes were initiated to get inflation under control. With the June report coming in at 3%[iii] and with July coming out on August 14, I would expect inflation to still play a role to the degree in which the Fed cut rates this year. While rate hikes have correlated with the decrease in CPI, it’s hard to know if one of the Fed’s few tools has been a causal factor in reducing the inflation rate. One could argue that increased borrowing costs with mortgage, auto, and consumer debt contribute to a much higher cost of living alongside price increases at the store. The market expects rate cuts before the year is done[iv], but it is important to note that monetary policy often has a lagging effect on the economy.
I previously wrote about markets during election years in my March article:
“[W]ith the 2024 election on the horizon, there are often a lot of headlines that make it seem as though markets are in for a rough go. Every two years, we seem to have an election that pundits describe as “Existential for [insert potential scary outcome here].” According to this study from Forbes Advisor, markets tend to do better the 12 months after an election cycle than the 12 months leading up. Looking at the dispersion of outcomes, this doesn’t seem highly predictive, and I question the likelihood of elections being a causal factor in market performance each election year. The fear may be there for clients, but Googling ‘election impact on stock markets’ and reading through a few of those articles may reduce some of the fear based on some of the historical data.”
Of course, nobody can predict future outcomes, especially when talking about unpredictable market cycles, but I don’t feel the election cycle is necessarily a causal factor in any potential positive or negative outcome barring a black swan political event. Granted, we’ve seen two big events play out recently with the attempted assassination and a major party candidate dropping out of the race after securing the delegates for the nomination.
The fall and winter months should be interesting. We’ll likely see headlines suggesting that things are about to hit the fan. I don’t know when we last had a clean fan. Investors have to stay the course with the long-term outlook in focus.
Take care, everyone!
[i] Mitra, M. (2024, August 5). The Sahm Rule Recession Indicator Definition and How It’s Calculated. Investopedia. Retrieved from https://www.investopedia.com/what-is-the-sahm-rule-8637564
[ii] Goldstein, S. (2024). A Closely Tracked Recession Indicator: The Sahm Rule Has Now Been Triggered—Here’s What That Means. MSN. Retrieved from https://www.msn.com/en-us/money/markets/a-closely-tracked-recession-indicator-the-sahm-rule-has-now-been-triggered-here-s-what-that-means/ar-BB1r5LMa?ocid=BingNewsVerp
[iii] Wallace, A. (2024, July 11). U.S. CPI Consumer Inflation June Report. CNN. Retrieved from https://www.cnn.com/2024/07/11/economy/us-cpi-consumer-inflation-june/index.html
[iv] CME Group. (2024). CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
