We have gotten a few emails over the last few days. As
I glance at the headlines, some interesting ones pop out,
“Is this 1987 all over again?”
“markets quake worldwide”
“An emergency Fed rate cut of 75 basis points is needed now.”
I can definitely see why people are concerned with headlines like those. Many articles are blaming the rapid decline on the jobs report from last week. Fewer than expected jobs were created and the unemployment rate rose more than was estimated. These are signs of a cooling economy. If the economy slows too much we could have a recession. We all remember 2009 and how terrible that was. When the word recession gets thrown out, that’s what we all picture. As of right now, this is all fearmongering. It may turn into something, but we are very far from a 2009 style recession.
The funny thing about the media is that the vast majority of people involved in the markets want the economy to SLOW DOWN. That’s right, last week’s data were good for the market outlook. Why? Because the Fed is actively trying to slow down the economy to fight inflation. To put this in perspective, just last Tuesday, the report on available jobs showed it holding mostly steady at 8.2 million job openings. A few months ago, that was 7.9 million. In 2009, it bottomed out at around 2.2 million openings. We are nowhere near the 2009 level. In fact, there are more jobs available today than anytime from 2000 through the end of 2020.
Just last Wednesday, some of the foremost minds on the state of the economy decided NOT to lower interest rates because the economy was still too strong. They of course didn’t have the data from last Friday which showed the jobs created, NOT LOST, were only 114,000 instead of the 179,000 from the month before. That’s still a gain and no reason for panic. Additionally, the unemployment rate grew to 4.3% from 4.1%. Again, for perspective, at the worst of 2009, the unemployment rate was 10% and in the worst of Covid, it was around 15%. Since 1971, it has only been as low as 4.3% for about a year and half during the tech bubble, and for the 6 years surrounding the Covid unemployment spike. So out of the last 53 years or so it has been at 4.3% or lower for about 7 total years. This is nothing that should spark a panic.
So what has been really happening in the last few days? Companies that were overbought on leverage are being sold. Japan raised interest rates and people got margin calls. That forced them to sell. Now, it’s time to slaughter the sheep. If the pundits and hedge funds can terrify the average investor enough, then the market will keep falling, and they can buy back at a lower level in a week or a month or whatever. The headlines for the last few months have been, “Is the magnificent 7 (or NVDA) in a bubble?” A reasonable headline now would be, “overbought margin stocks fall.” It’s ridiculous that the same media outlets that have been warning us that things were overpriced have completely forgotten about that and are now touting recession.
Unfortunately, what happens next is not certain. In the same vein that stocks got overbought, they could get oversold. I would guess that won’t be the case since the stocks we are primarily talking about are what I call “cult” stocks. You can point out their financials don’t support the stock price until you’re blue in the face and you get a response like, “We know Elon has something up his sleeve.” So they can fall, but they could also very quickly go back to overbought.
Several articles I have seen suggested that the Fed calling an emergency meeting and cutting rates by 0.5% to 0.75% in the next week was very likely. I highly doubt it. They are here to keep the financial system running smoothly, keep unemployment low, and inflation low. None of those have yet been threatened to my knowledge. People losing a month or three worth of gains in the market is not what the Fed is here to protect. That’s just something that happens periodically. Could conditions change? Of course they can, but unless there is some sort of liquidity crisis or something else, I doubt they do anything ahead of their September meeting. Once again, less than a week ago they thought the economy was too strong to support any rate cut.
So what should we do? The answer hasn’t changed in the last week or so. Remember, the market is still up for the year, and just last fall we had a big pullback, but still ended with a positive year. Earnings for most of the market are still strong and support the current prices. If we see a continued drop, and market fundamentals don’t change, we plan to buy. If PE ratios become unsustainable, then we will sell.
There are of course things to worry about out there in the
markets, but so far they are just worries. They haven’t come to pass and
after the tremendous job the Fed did during the Great Recession, Covid, and the
last couple of years of unwinding, I continue to have faith in them.
