Editor's note: The recent pullback has many investors on edge. But like us, Vic Lederman – the editorial director of our corporate affiliate Chaikin Analytics – says the volatility isn't a reason to sell. In this piece, published in the August 8 Chaikin PowerFeed e-letter, Vic explains why the fearmongering headlines are leaving out one important truth about the state of our economy...
Don't Buy Into the Recession Doom and Gloom By Vic Lederman, editorial director, Chaikin Analytics
Folks, it has been a wild ride in the markets lately... On August 5, Japan's stock market had its worst single-day decline since Black Monday in 1987. The next day, it posted its best single-day gain since 2008. As a result, the U.S. dollar index fell to its weakest level since January. And the S&P 500 Index collapsed nearly 5%. Even bitcoin took a big hit. Going into August, it was up more than 50% for the year. Then, it pulled back by about 16% before clawing back some gains. Now, fears of a recession are again making the rounds on Wall Street. Goldman Sachs raised its 12-month recession odds from 15% to 25% after July's poor jobs report was released on August 2... And that was before the rest of the market chaos. Investors are now looking to the Federal Reserve and Chairman Jerome Powell for hints about what comes next. The calls to start lowering interest rates are growing louder by the day. You might be thinking of running to the safety of U.S. Treasurys, gold, or plain cash. But as I'll explain, market trends don't mirror Main Street's economic reality. And by looking at the facts, we'll find that the economy isn't about to implode... Interest rates are a powerful tool to help steer the economy in the right direction. If the economy is growing too fast and inflation becomes a problem, raising rates helps to cool things down. When the economy is slowing down or in a recession, cutting rates helps to boost demand. Since the COVID-19 pandemic, we've seen the Fed do both... In March 2020, it made emergency rate cuts amid the pandemic crisis. Then, from March 2022 through July last year, it raised rates aggressively to combat inflation. Now, lower rates are always a welcome development for people and businesses. Think about it... Total U.S. household debt stands at about $17.8 trillion. That includes mortgages, auto loans, credit-card debt, and personal loans. A mere 0.25% reduction in interest rates means U.S. consumers would save about an extra $45 billion a year in interest payments. A 0.5% reduction – like many investors are expecting will happen in September – would free up twice that much money for consumers. That's money – assuming folks refinance – that people can spend on other things. But inflation still isn't completely out of the picture. So, giving consumers roughly $45 billion to $90 billion in additional spending money may not be the best thing to do right now. Meanwhile, the U.S. economy is still chugging along... For example, U.S. trade with the world has continued to boom. In June, exports grew at an annual rate of more than 5.9% to nearly $266 billion. That's the fastest rate since February 2023. It's also the second-highest month of exports ever. Imports grew at an even faster 7.3% annual rate. It was good for a grand total of $339 billion in June alone. That's the fourth-highest month of imports in history. Some folks worry that rising unemployment is telling us a recession is around the corner. July's unemployment rate of 4.3% is up from January's rate of 3.7%. But this is still a historically low level. And it's happening at a time when interest rates are still at their highest point in 23 years. Again, it's not necessarily a sign of an economy in deep trouble. Let's put it all together... Yes, recession fears are emerging again. And the high volatility in the markets lately has made those fears more pronounced. But that doesn't mean a recession is on the horizon. The data still points to a healthy economy overall. And the Fed looks increasingly ready to unleash tens of billions of dollars in new spending power. So don't buy into the excessive fear. Even in a strong market, pullbacks will happen. Nothing goes up in a straight line forever. The recent dip doesn't mean it's time to throw in the towel on stocks. Good investing, Vic Lederman
Editor's note: It has been a chaotic few weeks in the market... And according to Chaikin Analytics founder Marc Chaikin, we haven't seen the last of volatility this year. With the "September Effect" and the November election looming, making sound investment decisions will be tougher than ever. But one little-known strategy can help you weather the storm – with a chance to stack the odds in your favor... Click here to learn the details. Further Reading "It's more likely to see a correction than not in a given year," Brett Eversole writes. Market pullbacks can feel scary. It's natural to worry about what comes next – but in reality, most corrections don't lead to massive crashes... Learn more here. "This spooked market environment is no reason to cash out," Sean Michael Cummings says. Fear is back in the market. But according to history, similar "jolts of fear" haven't typically acted as a headwind for stocks... Read more here. |
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