Yesterday the world markets sold off as investors stampeded out of the market selling their client’s portfolios as fast as they could.  What spooked the markets yesterday is not much different than what normally triggers a stampede.  A jittery herd and then a sudden noise.   Yesterday was a setup waiting to happen as the media and analysts have been pounding the two “R’s”- “Recession” and “Rate Cuts”. 

Midday yesterday, the LA Times succinctly summarized the same relentless talking points since 2022 by almost every media outlet:

“Friday’s jobs report, which showed a sharp slowdown in hiring and unemployment in July, set investors — even those not deep into tech — on edge. That came on the heels of news that jobless claims, a proxy for layoffs, increased significantly in the waning days of July.

It hasn’t helped that the Federal Reserve has been reluctant to start cutting interest rates, which have throttled inflation as intended but also weighed down businesses and consumers.

Then there’s the reverberation from global markets. On Monday, Japan’s once-high-flying stocks took their worst drubbing since Black Monday in 1987. The huge losses were seen, in part, as being a reaction to market declines and growing concerns in the U.S.”

Let's take a deeper look at these three points.

1. Friday’s jobs report, which showed a sharp slowdown in hiring and unemployment

The Friday jobs report set off a weekend of doomsayers opining worrisome scenarios-based half-truths and inaccuracies.  For example, Friday’s Bureau of Labor Statistics (BLS), U.S. Department of Labor report indicated only 144,000 new jobs were created in July.  What the media fails to mention is July’s 144,000 new jobs was not the lowest number of new monthly jobs in the past 14 months.  In fact, July new jobs were greater than those created in April 2024, March 2023, and December 2022.  Wonder why investors didn’t panic then.

However, the media seemed to ignore relevant data in the same Friday report that employees continue to be paid more, and annual wage increases in July of 3.6% is 44% higher than the current inflation rate of 2.5%.  Econoday provided the following commentary:

“Average hourly earnings are up 0.2 percent in July from June and up 3.6 percent year-over-year. The annual increase is the lowest since it went up 2.3 percent in May 2021. The softening of the pace of increase in hourly earnings is in part because the competitive pressures for some industries have eased considerably. For example, retail hourly earnings are down 0.1 percent in July from June and up 2.0 percent year-over-year. Elsewhere wage pressures remain more elevated such as construction where the month-over-month increase is 0.4 percent and year-over-year is up 4.3 percent.”

For some reason, the media also failed to reference Tuesday’s Jobs Opening and Labor Turnover (JOLT) report.  In that report provided by BLS indicated that job availability is at a 24-year record level with still 8.184 million more jobs than eligible workers.  The number of unfilled jobs has remained at levels that still exceed the pre-pandemic 2016- 2020 years.  I wonder why the media failed to inform the public of this important data on the labor market.

2. The Federal Reserve has been reluctant to start cutting interest rates.

This topic seems to be the dumbest issue for the media and analysts.  I can’t imagine how frustrating it must be for Jerome Powell to clearly state the position of the Federal Open Market Committee (FOMC) and not a minute after he completes his speech the media starts opining on pending interest rate cuts. 

On July 31, 2024, Jerome Powell had a press conference to report on the results of the FOMC meeting in the preceding days.  In his speech, he made a number of remarkable positive observations about the US economy and the results of the 2022 – 2023 rate hike campaign.  He started his speech by saying,

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people.” 

Some of the highlights of his short speech include (click here to read the transcript):

• The labor market has come into better balance and the unemployment rate remains low.  Inflation has eased substantially from a peak of 7 percent to 2.5 percent.  We are strongly committed to returning inflation to our 2 percent goal in support of a strong economy that benefits everyone [emphasis added]

• We are maintaining our restrictive stance on monetary policy in order to keep demand in line with supply and reduce inflationary pressures.

• Recent indicators suggest that economic activity has continued to expand at a solid pace.  GDP growth moderated to 2.1 percent in the first half of the year, down from 3.1 percent last year.

• Growth of consumer spending has slowed from last year’s robust pace but remains solid.

• Investment in equipment and intangibles has picked up from its anemic pace last year.  In the housing sector, investment stalled in the second quarter after a strong rise in the first.  Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.

• In the labor market, supply and demand conditions have come into better balance.  Payroll job gains averaged 177 thousand jobs per month in the second quarter, a solid pace but below that seen in the first quarter.  The unemployment rate has moved up but remains low at 4.1 percent.  Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in participation among individuals aged 25 to 54 years and a strong pace of immigration.

• Nominal wage growth has eased over the past year and the jobs-to-workers gap has narrowed.  Overall, a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic—strong but not overheated. 

• Inflation has eased notably over the past two years but remains somewhat above our longer-run goal of 2 percent.  Total PCE prices rose 2.5 percent over the 12 months ending in June; excluding the volatile food and energy categories, core PCE prices rose 2.6 percent.

• We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent.

• The Fed has been assigned two goals for monetary policy—maximum employment and stable prices.  We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored.  Restoring price stability is essential to achieving maximum employment and stable prices over the long run.  Our success in delivering on these goals matters to all Americans.

Honestly, I did not cherry-pick these statements.  The last two quotes could not be more succinct.  Jerome Powell and the committee are not changing the discount rate until inflation is sustainable at 2% with maximum employment. 

No sooner did the Fed Chair finish his speech, than Jeanna Smialek, a New York Times reporter, shot up her hand to ask the first question.  Her question quoted is (I am not joking):

• “Markets pretty much entirely expect a rate cut in September at this stage. I wonder if you think that's a reasonable expectation and if so, why not just make the move today? Thank you.”

Did she not hear Jerome Powell’s speech moments earlier?  Who is “the markets” and when was she appointed as their spoke person?  I am convinced she had that question already prepared or given to her regardless of what the Fed Chairman said. 

Not surprisingly, the next day July 31, 2024, The Wall Street Journal's front page above the fold headline was:

“Powell Tees Up Fed Rate Cut Next Month”

Did I miss something?  When in the Fed Chair’s speech did he say the FOMC is “teed up to cut rates”?  First, the next FOMC meeting is not in August (it’s September 17-18) so any rate change will not happen next month.  Secondly, Jerome Powell never used or even referenced the phrase “teed up”.  More importantly, in his entire speech, he never used the words “rate cut”.  In fact, the first mention of a “rate cut” was by Ms. Jeanna Smialek from the NY Times in her ridiculous question.

This may come as a surprise to you, but the media has its own narrative and doesn’t let the facts get in the way of a good story.   

3. The huge losses [in Japan markets the night before] were seen, in part, as being a reaction to market declines and growing concerns in the U.S.

Although not said, the reference to “concerns in the US” is to the “R” word – recession.  Ever since the Federal Reserve started raising rates in March 2022, the media has been convinced the US will be entering a recession soon.  More than two years later, Jerome Powell stated in last week’s speech that,

“Recent indicators suggest that economic activity has continued to expand at a solid pace.  GDP growth moderated to 2.1 percent in the first half of the year, down from 3.1 percent last year.”

Did you notice the reference to “solid pace”?  Keep in mind, that every word and pause are thoroughly scripted and scrutinized by the committee and their speech writers.  Doesn’t sound like the Federal Reserve is concerned or even “growing” in its concern about the US economy.  The International Monetary Fund (IMF) released their 2024 GDP growth projections for all 226 countries.  The world average growth is projected at 3.2% including hypergrowth countries of Macao (80.5%), Guyana (33.0%), and Libya (10.2%).  Last year the US, arguably the most influential nation in the world, was expanding at the average pace of the entire world.  By comparison, below are a few countries listed in this IMF report:

What Does This Mean to Me?

We maintain our favorable view of the US economy and stock market for economic growth and investing.  If the Federal Reserve, after reviewing confidential data on the economy, believes “economic activity has continued to expand at a solid pace”, then who are we to disagree? 

We have stated several times the potential of a summer stock market selloff due to the strong first-half-year performance.  We discussed in our Weekly Update titled, Summer Market Correction, about the normal cycle during a positive uptrend when the stock market indices will increase almost 70% of the time.  The pullbacks or corrections are normal and provide opportunities for new investments. 

Never in history have major indices not recovered from recessions, corrections, and crashes.  This includes horrific periods like the Great Depression and the 1970’s.  The US economy appears to be stable with minimal evidence of a pending recession.  Therefore, we would view this market weakness as a buying opportunity.  The market indices may remain soft through August and maybe until the election.  Monday’s selloff though may prompt investors back into the market due to deep discounts of stock darlings in sectors including technology, energy, and finance.