Afford Anything - The Stock Market is in Panic Mode and the Unemployment Rate Jumped – But Everything’s Fine

Episode Date: August 2, 2024

#528: The Federal Reserve recently decided to hold interest rates steady, leading to significant shifts in the stock market. The Dow dropped over 850 points, and the NASDAQ entered correction territory, falling more than 10% from its peak. But what do these numbers mean for you? We break down the latest jobs report, which shows a rise in unemployment to 4.3%, triggering a recession indicator known as the Sahm Rule. This isn't just economic jargon; it affects real lives, impacting job security, investments, and financial planning. We discuss potential ripple effects on various sectors, such as real estate, where interest rates influence housing affordability.  We also examine the technology sector's volatility and how recent market corrections might influence tech stocks and the overall investment landscape. Understanding this can help you make informed decisions about your investment portfolio. Every First Friday of the month, we bring you our "First Friday Monthly Economic Report," where we help you make sense of these trends.  We aim to make complex economic concepts accessible. Join us as we explore these pressing economic issues.  Timestamps Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. 1:23 - Discuss the Fed's decision to hold interest rates steady and its economic impact. 3:15 - Explore how recent economic changes affect the Dow and NASDAQ for investors. 5:30 - Explain the SAM rule and why unemployment rising to 4.3% matters. 7:45 - Analyze how interest rates affect housing affordability and real estate. 10:05 - Examine tech sector volatility and its impact on stocks and investments. 12:30 - Look into how economic trends influence consumer spending patterns. 14:42 - Offer tips on managing debt, building emergency funds, and smart investments. 17:03 - Stress the importance of informed decision-making and understanding trade-offs. 19:27 - Highlight the role of "First Friday Monthly Economic Reports" in understanding trends. 21:15 - Wrap up with insights for applying knowledge to financial decision-making. For more information, visit the show notes at https://affordanything.com/episode528 Learn more about your ad choices. Visit podcastchoices.com/adchoices

The Federal Reserve met earlier this week and decided to hold interest rates steady. The Dow has lost more than 850 points. The NASDAQ has entered correction territory, falling more than 10% from a record high. And the latest jobs report came out, looking exceptionally weak, with unemployment rising to 4.3% and triggering a recession indicator known as the SAM rule. What does this all mean? We make sense of it in today's first. First Friday, monthly economic report episodes.

Welcome to the Afford Anything Podcast, the show that understands you can afford anything, but not everything. Every choice that you make carries a trade-off. And that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, to any limited resource you need to manage. So what matters most and how do you make choices accordingly? That's what this show is here to solve.

My name is Paula Pant. I hold a master's in business and economic reporting from Columbia. On the first Friday of each month, I host a monthly economic update. So, welcome to the August 24, first Friday economic update. The Federal Reserve met earlier this week. Now, the Federal Reserve sets interest rates and they meet eight times a year, on average once every six and a half weeks. The Federal Open Markets Committee and Chairman Jerome Powell, issued a statement with zero forward guidance.

What that means is everybody was watching this meeting to get a clue as to whether or not the Fed is going to lower interest rates in September. It was widely agreed upon. Economists, analysts, pundits, investors, the entire economics and markets community in lockstep was in agreement going into this meeting that nobody expected the Fed to lower interest rates

at this week's meeting. It was one of those rare issues that absolutely everybody could agree on. What we were all watching was to see whether or not the Fed would drop hints about whether the first interest rate cut would hit in September, because there is controversy among investors, economists, analysts, as to if that first rate cut is going to happen in September or if it's going to happen later on at their November or December meeting or maybe not even until 2025.

So we were all watching closely to see if. they would drop any hints. In fact, Fortune Magazine actually referred to this week's Fed meeting as, quote, a warm-up act for September. What happened at the meeting? Chairman Jerome Powell left the possibility of a September rate cut on the table. He emphasized that no decision has been made about the September rate cut and that any decision that will be made will be apolitical. He made it clear that if inflation stays cool, then the possibility of an interest rate cut happening in September is a possibility. The exact words that he used were, quote, as soon as September. And he also used the words, quote, could be on the table. Now, depending on who you are,

you could view that as either neutral or positive. There are some analysts who argue, The language is a little bit too vague. There are others who say the fact that he talked so much about the possibility of a September cut, the fact that he went out of his way to emphasize that it would be an apolitical decision and that they would be open to discussing it. It's clear that everybody's eyes are on September is quite a promising sign. So yes, of course, they're not going to tip their hand because they're the Fed and they can't. but the markets are interpreting Powell's statements with optimism,

which leads to the next topic, the markets. As of this morning, the first Friday of August, if you glance at the news, you're going to see some chicken little sky is falling, fear-inducing headlines. Oh, there's a market sell-off. The Dow is down 900 points. The S&P had its worst decline since 2022.

Yes, after an indefinite. enormous and prolonged run-up, the stock market is making a minor pullback, but you wouldn't know that if you were to read the anxiety-inducing headlines. Fear generates clicks. If you want big-picture perspective on the current market decline, look no further than a tweet that came out this morning from a previous guest on the Afford Anything podcast named Morgan Housel, author of the book The Psychology of Money. Morgan Housel tweeted, quote, This is the biggest market decline since the last decline you don't remember or care about anymore.

Not only is that a perfect encapsulation of what is happening in the markets right now, it's also a fantastic litmus test. Anytime there's a market decline, ask yourself, is this decline severe enough that I will remember this five years from now? What are the declines that we actually remember? We remember March of 2020. We remember 2008. And part of the reason that we panic about minor declines is that it's easy to conflate noise with signal.

It's easy to look at a decline and think, is this the canary in the coal mine? Is this a harbinger of another 2008 around the corner? But any look at the fundamentals says otherwise. Let's zoom out. The S&P 500 is up 70% since its lowest point in 2022. And it has risen 28 out of the last 37 weeks, which is its best streak in more than 30 years. That said, valuations are high. So all it's going to take are a couple of underwhelming earnings reports for some investors to say,

you know what, valuations are maybe a little bit too high. Let's scale back. But that's not evidence of weak fundamentals. It's simply evidence of valuations that ran a little amok because it saw fundamentals that were so strong. Which is to say, the outlook for the long term remains solid. I know I've talked a lot in the past about technology and AI, so let's look outside of that at other industries outside of tech that are doing well. Let's turn our attention to finance. Net profits at J.P. Morgan are up 25.

percent year over year. Morgan Stanley is up 41%. Goldman Sachs in the last year has more than doubled its net profits. And Citigroup is quote unquote lagging by being up only 10%. With the exception of Wells Fargo, fees from the five biggest banks from investment banking have risen by 40%. So the financial sector doing really well. The tech sector, of course, we've already established. Gold. Gold is doing well. Gold has actually reached a new record high, largely because the gold bugs are betting, I think reasonably so,

that cooling inflation is going to lead to interest rate cuts, which is what we just talked about at the start of the show. They're betting the interest rate cuts will lead to a resurgence in the price of gold. Pharma is doing incredibly well, particularly Eli Lilly and Novo Nortis, which have such an incredible economic moat around them through semagletides and terseptides, that with the cost of R&D and the CAPEX required to develop these drugs, Eli Lilly and Novo Nordus have a level of economic moat that I think would be rather challenging,

if not impossible, for many competitors to catch up with. So we've got finance doing well, we've got pharma doing well. We've got tech doing well. We've got luxury goods doing well. Now, inside of that, there are individual businesses that are in trouble. Macy's is in a lot of trouble. Wells Fargo is in trouble. Bank of America also.

But utilities are booming. I mean, so sector by sector, most sectors in the American economy have outstanding performance. And if you take a look at the global economy, you'll see that markets are either at or near all-time highs, not just in the U.S., but also in the Eurozone, in Japan, and for many emerging markets economies. Now, they're not doing quite as well. The U.K. in particular. The U.K. currently has the worst economy since 1945. It had a mild recession in 2023. It has done well with inflation. The inflation in the U.K. is nearing 2%. But overall, the British economy and British productivity is struggling. So, yes, we do have.

in the same way that we have individual companies like Macy's that are faltering, we also have certain economies like the UK that are also quite shaky. But zooming out of that, region by region, you know, in the way that for the U.S. economy, we would, instead of individual companies, we would look sector by sector. In the global markets, instead of individual countries, if you look region by region, the whole world overall, in regional aggregate, is doing well. economies across the globe are strong and nowhere is it stronger than in the U.S. At this point, the majority of companies around the world that IPO list themselves on a U.S.-based stock exchange. The clothing company, the fast fashion retailer, Sheen or Shine, S-H-E-I-N, initially tried to go public on a U.S.-based stock exchange,

but they couldn't do to U.S.-China tensions. And so then the company, which is China-based, deliberated between either a Hong Kong IPO or a London IPO, they are still at this point attempting to IPO on the London Stock Exchange at an initial offering of $63 billion U.S. dollars or 50 billion pounds. Now, will that happen? We don't know. That attempt is still in the works. That filing is still under consideration. It's notable because the London Stock Exchange has not. not had that big of an IPO in a very long time. It's heyday. The London Stock Exchange's

heyday was back in 2005. At that time, one out of every five companies IPOing globally was listed on the London Stock Exchange. These days, you never hear about it. These days, the IPOs happen here. So what you have right now is you have a global economy where there are specific countries that have some disappointing performance. I haven't mentioned China, but China is down about 10% in dollar terms since last year. So China is year over year the worst performing of the major markets. And China in particular has a property crisis that makes hours by comparison look like preschool. Brazil is also struggling. Their currency lost 17% of its value against the dollar over the past 12 months. That's June 2023 to June 2024 data. And that's the worst performance

of any major currency. So yes, on a global scale, you've got some certain individual nations that are struggling. But then you've got others like Vietnam and India that are flourishing. And when you encompass all of those into a regional picture,

every major region is strong and markets around the globe are at or near all-time highs. But that's not the story that you get when you turn on the 24-hour news cycle, because by definition the 24-hour news cycle is designed to give us the small picture, the latest developments, the 24-hour update, rather than the zoomed-out 30,000-foot view. Let's put this all into context story. And that's why we do these monthly economic updates on the first Friday of every month to zoom out and take a look at it from a bird's-eye view.

So have the U.S. markets dipped a little bit? Yeah, about time. It's been a unrelenting run-up to such an extent that people are starting to believe that the market is just a high-yield savings account. And that is a level of complacency, risk complacency, that we can slip into when we have nothing but charts that slope up into the right. So finally, we've got a little bit of healthy volatility, a minor zig and zan, zan, that none of us are going to remember a year from now, or even six months from now. And so the next time that you see a headline

with some scary news about the markets, ooh, the S&P 500 just had its largest single-day decline since 2022. Yeah, the next time that you see some scary news about the markets, remember that. Those headlines are there because fear generates clicks. By the way, you want to hear a story about fear generating clicks? I recently hired a guy to build thumbnails for us on YouTube. The YouTube thumbnails.

I asked him to design a thumbnail for the interview that we did with financial advisor Michael Kitsis, which just aired on this podcast about a week ago. The title of the Michael Kitsis podcast episode is a question. And that question is, is the economy doing worse than we think? And the answer, if you listened to the episode, is absolutely not. In fact, the economy is doing far, far better than we think. Michael Kitsis does an amazing job of explaining precisely why. So if you haven't listened to that episode, please go back and listen to it. So I hire this thumbnail designer, and he sends me a list of suggested thumbnail titles.

You know what, here, let me just read them to you. Quote, we are heading for an economic cliff. We're nearing an economic abyss. The S&P 500 is about to burst. I emailed him back and I was like, dude, what are you talking about? the statements in this title directly contradict the actual content of the episode. The content of the episode, if you listen to the Michael Kitts' episode, is our economy is really strong and it's doing really well. And here's a lot of data to support that.

And here's a lot of historical context around the markets to support that. But the thumbnail designer, whose job is to design thumbnails that get clicks, says, you know what? we can change it if you want, but you're not going to drive as many views as you would otherwise get if you just said, we're nearing an economic abyss, a crash is coming, we're heading for an economic cliff. Obviously, I said no, we're not publishing that. But that's the way these decisions are made. That's the way the headlines are written. And what's horrifying is that people then make investing decisions based on that.

Because how can you not? It's surround sound. When you hear the same fear-inducing messaging day in and day out, how can you not become more pessimistic? It's natural to learn from the messages that we're surrounded by. And so when we're surrounded by messaging that is fear-based rather than factual, we often start believing the clickbait thumbnails, and as a result, we take fewer risks.

We put too much of our money in bonds or cash and not enough in equities. Or we stay in a dead-end job for way too long, falling privy to just one more year syndrome. Just one more year. Just one more year. I'm not ready to take a big career risk yet. I'm not ready to go start my own business. Not in this economy.

I think I need a bigger runway. I think I need more savings. Just one more year. Right? We live a life where we play it too safe. because we're told that everything is collapsing around us. Because if it were true that everything is collapsing around us, then yes, the reasonable course of action would be to play it safe. But we're actually taking economic cues from messaging that is short-term, narrowly focused,

and designed to get us to click, not to get us to make the most sound and informed and grounded monetary decisions. decisions. Despite the headlines that you are seeing right now, the markets, particularly the U.S. market, is fine. The economy is strong, businesses are strong, sectors are strong. We're doing well. Unemployment has ticked up. Unemployment is up to 4.3%. But if you're trying to make a decision as to whether you should stuff cash under your mattress or put more into your 401k, don't let the noise about the markets scare you from upping your 401k contribution. Because again, to go back to what former podcast guest Morgan Housel said, this is the biggest market decline since the last decline you don't remember or care about anymore.

With that said, we're going to take one and only one break in today's episode to hear from the sponsors who allow us to bring you 30,000-foot view economic analysis at no cost to you. And when we return, we'll talk about the jobs report and the latest unemployment figures based on new data that was just released this morning. Stay tuned. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays, you can get up to 70% off during Wayfair's Black Friday sale.

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being said, unemployment in the big picture has been at a 50-year low. U.S. unemployment stayed below 4% for 28 consecutive months. That's the longest streak since the Vietnam War. So with the July unemployment figures climbing to 4.3%, we have now broken that 28-month streak. The Labor Department reported that the U.S. added 114,000 jobs in the month of July, marking the 43rd straight month of job growth. However, it was only the second smallest gain within the last 43 months. So what does that mean? To put it simply, for 43 consecutive months, jobs have been growing, but we're not adding new jobs as fast as we used to be. In many ways, that means the Fed's efforts at cooling the economy are finally starting to work. It was shocking when the Fed raised interest rates

up to where they currently are. Our current federal funds rate is between 5.25 to 5.5%. Right. So the Fed issued 11 consecutive rate hikes. We got interest rates to where they were. Everyone thought that would cool the economy, but the economy stayed really resilient and jobs kept growing. A lot of that was largely fueled by the surplus,

the savings that people had accumulated, people and companies had accumulated during the days of the pandemic. It looks as though at this point that surplus, has been worked through, and the Fed's efforts to cool the economy and to slow job growth is finally starting to show. And that is yet another reason why some people, although this is controversial, some people believe that the Fed might lower interest rates in September. So you see how these all link back. Now, where are these jobs coming from? Well, the health care industry added 55,000 jobs, and the construction industry added 25,000 jobs. So those two sectors drove a big bulk of the

114,000 new jobs that were added last month. When it comes to putting this jobs report into context, the thing that we will have to watch for very closely is what next month's jobs report looks like. The reason is there is a particular indicator. It's called the SAM rule, S-A-A-A-A-H-R-R-E-R-E-H. It was named for former Federal Reserve economist Claudia Sam. And the formula is quite simple. If the three-month moving average of the unemployment rate exceeds the lowest three-month moving average of the past year by half a percentage point or more, then we have reason to worry. It's considered a recession indicator.

With this morning's jobs report, we are now in flashing red zone territory with the Sam rule, which is another way of saying the three-month moving average of our unemployment figures is just more than half a percentage point higher than the lowest three-month moving average of the past year, which is another way of saying that when we compare the most recent three months to the most recent year, we see unemployment ticking up. So here's what we should look for next. Coming up in next month's report, are we going to see further job cuts? Are we going to see business revenue declines? Are we going to see consumer spending declines? And if so, will the Fed counteract that by lowering interest rates? Those are the questions that we face as we

head into the next two months. So the next Federal Reserve meeting is September 18, which means that the Fed will have data from the Labor Department. The Labor Department releases jobs data on the first Friday of every month. So by the next Fed meeting, which is September 18, they will have the data that got released this morning, which is the data that reflects the month of July. They will also have the data that's going to be released on the first Friday of September, which is the data that will reflect the month of August. And so, armed with data from the first Friday of both August and September, the Fed going into their September 18 meeting will know whether or not this uptick in unemployment is serious enough to warrant a reduction in interest rates in order to spur the

economy. And of course, that will have to be contextualized with inflation data, consumer spending data, lots of other information. But jobs in particular, given the dual mandate of the Fed, will lead the decision-making process around interest rate reductions. So pay close. attention to the jobs report that gets released on the first Friday of next month, the first Friday of September, because today's jobs report was not great. And if we end up having two crummy jobs reports in a row, then I think we have a pretty strong case for the Fed reducing interest rates, which means your mortgages might get a little bit cheaper. Now remember, I'm going to put a big asterisk here. Remember, it took 11.

consecutive rate hikes to get to where we are now. So it's going to take approximately just as many rate cuts to get back to where we were. And we're not going to go all the way back to the ZERP era, the zero interest rate policy era. The days of a 2% mortgage are long, long behind us. No one should be normalized to that. But if you're wondering when you should refinance your mortgage, then pay attention to the jobs report that comes out on the first Friday of the month and use that as an indicator of whether or not you can expect the Fed to lower interest rates. And then remember that after three or four rate cuts, assuming a rate cut of 25 basis points each time, three or four rate cuts will give you a mortgage interest rate that is significantly different enough that

it actually makes a dent and is actually worth taking into your plans. Remember, when I say 25 F-based points we're talking about a quarter of a percentage point. So it's going to take four rate cuts at that level to reduce your mortgage interest rate by one percentage point, which is, as a generalized rule of thumb, a difference of one percentage point is the minimum difference that you would want to see before you could justify paying the costs associated with a mortgage refinance. Now, that being said, here's another asterisk. There are some people who's lends. have given them one free refinance prior to the end of 2024. If you are in that boat, your calculation is different because you're not considering the cost of the refi. You're at

the beginning of your amortization schedule and you don't have to pay any costs associated with the refi if this is a incentive that was given to you by your lender at the time that you made your home purchase. So if you're in that boat, then you don't need to wait for a full percentage point decline. If you're in that boat, just wait until after you're in that boat, just wait until after the Fed's November or December meeting. Ideally, they're December meeting depending on when your lender's deadlines are, but you'll want to look at your lender documents to make sure you get in before the deadline. And then process your refi because even if it's only half a percentage point, heck, it's a free refi and that's better than nothing. But for the rest of you, for the majority

of people in this community who would have to pay out of pocket for the costs of a refi, wait until interest rates have declined by at least one full percentage point before you make that switch. To recap, the stock market is having some normal volatility, but it's been a while since this has happened, so everybody is losing their minds. And the media is reporting a flight from stocks as the Dow sinks, crashes, burns, plummets. Okay, point number one of today's episode is do not worry. worry about what's happening, this minor little shake up in the U.S. stock market right now, rather than losing your mind, you are better off losing the password to your investment accounts so that you cannot log in, see a drop, spook yourself, and sell.

You are better off ignoring the fearmongering and investing for the long term. So that's point number one from today. Point number two. The Fed met. They held rate steady, just as everybody expected them to do so. but they left the door open to a rate cut in September, which leads us to point number three. The jobs report came out,

and even though we have had three and a half years of month-over-month consistent, consecutive job growth, we also had the worst jobs report in the last three years. So two things are true simultaneously. In the big picture, the job market is doing well, but in the short term, it's getting worse. and because it's getting worse, that might fuel the Fed to lower interest rates in September. So we'll have to see what next month's Straub's report says before we can have a more accurate guess on what the Fed is going to do in late September.

So those are three highlights about the economy, and that is a snapshot of where we are economically right now. Thank you for listening to this first Friday monthly economic. report from the Afford Anything podcast. I appreciate you tuning in. Please subscribe to our newsletter at absolutely no cost by going to afford anything.com slash newsletter. Again, that's afford anything.com slash newsletter. You can also chat with other members of our community by going to afford anything.com slash community, both of which have absolutely no cost to you.

Thank you so much for tuning in. My name is Paula Pantt. This is the Afford Anything podcast, and I'll meet you in the next episode.