Over the first few trading days of August, investors have again been reminded that markets don’t just rise. From Thursday, August 1 through Monday, August 5, stocks have declined about 6%. While this level of decline feels somewhat “pedestrian”, it has certainly attracted attention.
It’s important to note that the media is always looking for reasons to explain the movements of financial markets. When stocks rise, it’s caused by some recent optimistic factor. When stocks declined, it’s attributed to some downbeat headlines. As humans, we seek explanations for everything.
This time, general recession fears have been pegged as the proximate cause for the market’s recent decline. In part, these fears have been driven by a few items.
The July jobs report was a bit weaker than expected. This report was joined by another negative reading of a closely-watched index of manufacturing activity. And, finally, investors are growing impatient with the Federal Reserve. There is a growing concern that the Fed is already “behind the curve” and has waited too long to cut interest rates to avoid a recession.
Recession worries have been constant since the Fed quickly raised interest rates in the spring of 2022 after their very slow response to the post-Covid rise in inflation. They steadily raised interest for about 18 months. Since August 2023, however, they’ve paused and have vowed to watch how things unfold.
The economy has continued to grow through it all. Yes, the latest job report showed a decline to only about 115,000 new jobs in July. But, the statistical margin of error of the jobs report is wide. Monthly reports should be viewed with some perspective. Over the past year, the US economy has added about 200,000 new jobs per month. Over the past six months, the monthly average is about 190,000. And, over the past three months, the monthly average was about 170,000. Yes, the jobs picture is slowing. But, things certainly don’t appear to be falling off the proverbial cliff.
Now, with inflation readings having steadily and significantly fallen since hitting their peak in late 2021, the Fed is expected to begin cutting rates at their September meeting. And, with the unemployment rate now finally rising after staying stubbornly low in face of substantial interest rate hikes, there is sufficient reason for the Fed to cut rates to help support the economy.
Without sounding like a Pollyanna, my current take on the recent stock market decline is investors are behaving like a person who shoots first and asks questions later. The fact is, as hard as we may try to explain the inexplicable, nobody really knows what causes markets to suddenly rise or decline.
