Folks, it has been a wild past few days in the markets…
On Monday, Japan’s stock market had its worst single-day decline in 37 years. The next day, it posted its best single-day gain since 2008.
Also on Monday, the U.S. dollar index fell to its weakest level since January.
Meanwhile, on Friday and Monday, the S&P 500 Index collapsed by 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% by Monday before clawing back some gains.
Now, fears of recession are again making the rounds on Wall Street.
In fact, Goldman Sachs raised its 12-month recession odds from 15% to 25% after last week’s poor jobs report.
Investors are now looking to the Federal Reserve and Chairman Jerome Powell for hints. The calls to start lowering interest rates are growing louder by the day.
This might have you thinking of running to the safety of U.S. Treasurys, gold, or plain cash.
But market trends don’t mirror Main Street’s economic reality…
Interest rates are a powerful tool to help the economy go in the right direction.
If the economy is growing too fast and inflation becomes a problem, higher rates help to cool things down.
When the economy is slowing down or in a recession, lower rates help 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 since March 2022 through July last year, it raised rates aggressively to combat inflation.
Now, lowering rates is always a welcome development to 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 they 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 money to spend 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 of growth 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 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 in 23 years. Again, it’s not necessarily a sign of an economy in deep trouble.
Putting it all together…
Yes, recession fears are emerging again. And the high volatility in the markets this week has made these fears more pronounced.
But that doesn’t mean a recession is right around the corner. 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.
I’ve said it numerous times this year here in the Chaikin PowerFeed – even in a strong market, pullbacks will happen. Nothing goes up in a straight line forever.
The recent sharp pullback doesn’t mean it’s time to throw in the towel on stocks.
Good investing,
Vic Lederman
