Why Stocks Are Falling Today – Forbes Advisor – Technologist
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The vibes are shifting.
Just a few weeks ago, stocks hit all-time highs and a report showed the economy grew better than expected in the second quarter. Since then, investors have begun to worry that the July employment report, coupled with volatile markets abroad, may be signaling the beginnings of a recession.
The S&P 500 is down nearly 5% over the past five days. Popular individual stocks are experiencing a greater range of volatility, with Apple (APPL) down nearly 4%, Nvidia (NVDA) down nearly 10% and United Health Group (UNH) up 1% over the past five days.
Worries Abound
Undergirding this spasm of anxiety is the concern that the Federal Reserve has held interest rates too high for too long.
“Based on softer-than-expected early-August economic and employment reports, investors worry that the Federal Reserve has waited too long to cut rates and will now be forced to be reactive rather than proactive,” says CFRA chief investment strategist Sam Stovall. “This renewed uncertainty has caused the equity markets to retreat once again and incited a rotation into bonds.”
Here’s what you need to know and what you should do to fortify your finances.
July’s Employment Report
Market participants developed a bout of disquiet thanks to a series of recent reports showing the economy may be faltering.
One of the big culprits was the poorer-than-expected July employment report. Employers added just 114,000 workers, and the unemployment rate jumped to 4.3%, the worst reading in almost three years.
The report also showed business owners added 29,000 fewer workers in May and June than previously reported.
Adding to the unrest are initial jobless claims, which climbed by about 50,000 since the beginning of the year to 249,000 by the end of July.
Recession Concerns
Historically unemployment remains low, but the dip has caused market observers to worry that the Fed’s aggressive policy to bring down inflation has increased the chances of a recession.
This concern has been amplified by other economic developments, including a worsening manufacturing outlook, massive sell-offs in Japan and continued tension in the Middle East.
Still, these are mostly new events and it’s too soon to know what they mean for the near-term future for investors.
“It remains to be seen whether this recent weakness in the labor market is the canary in the coal mine (in which case the selling is justified) or if it is just a temporary cooling of the job market (in which case this will prove to be another buying opportunity),” says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Where’s The Fed
While it was a foregone conclusion that the Fed was gearing up to cut borrowing costs at its next meeting in September, the question now is by how much.
The expectation is that the Fed will cut more deeply than previously thought. According to the CMEGroup FedWatch tool, there’s a nearly 87% chance the Fed will slash rates by 50 basis points, compared to a 15% chance it’ll be a more typical 25-point decrease.
The Fed has kept the federal funds rate at a range of 5.25% to 5.50% for more than a year to slow price growth closer to its 2% target. While prices are still growing faster than they’d like (2.6%, according to the Fed’s preferred inflation gauge), they have decreased velocity substantially.
The progress on inflation, borne on the back of high interest rates, is why the Fed can begin to turn its attention toward the other half of its mandate: the labor market.
“Friday’s jobs report was an inflection point for stocks and shows that after two years of elevated interest rates, we are finally starting to see the Fed’s efforts to reduce economic enthusiasm and inflation make its way to the labor market,” said James Demmert, chief investment officer at Main Street Research. “The slowdown in hiring is the surest sign yet that the days of high interest rates are numbered.”
What You Should Do
The dramatic turn in narratives can be disorienting. Here’s how to put yourself in the best position as the news turns topsy-turvy.
Maintain perspective. While stocks may be down more than 4% over the past 5 days, they’re up nearly 10% for the year. The economic picture is also better than the recent pall of doom may suggest. The Atlanta Fed’s GDPNow tool pegs economic growth in the third quarter at a robust 2.5%, for instance, and the service sector is very healthy. The Fed will almost certainly cut rates next month, which typically redounds to the benefit of stocks. There may be volatility to endure, but it’s not obvious that stocks will suffer in the short term.
Shore up your emergency fund. Improve your financial security by dedicating more resources to your emergency fund. Aim to amass two months of income in a high-yield savings account; the more cash you have, the better you’ll be able to deal with a job loss should a recession occur. Consider locking in the best certificate of deposit (CD) rate you can find before the Fed slashes rates and the banks follow suit.
Lower your debt burden. Interest rates on debt products—such as credit cards—have spiked over the past year, putting an extra burden on those struggling to make ends meet. Look for opportunities to refinance your IOUs as interest rates come down, including taking advantage of balance transfer credit cards or debt consolidation loans.
The key is to remember that you have the power to positively impact your situation even when times are tough.
Now is the time to fortify your financial grit.