Happy August everybody! My kids go back to school in a few weeks so it feels like Summer is finally drawing to a close. As a certified football and cooler weather fan, I’m counting down the days.
Read on for a recap of the market in July and why I’m worried about what’s to come.
Preschool is only really school in the technical sense, but you get the idea
The Markets & Economy in July
The S&P 500 fell slightly for the month, dragged down by some of the stocks I’m about to mention. (In full disclosure it’s probably going to be even lower by the time you read this, as a bad jobs report just hit my inbox. More on that in a minute.)
The tech sector has been carrying the entire stock market on its back recently. (We discussed Nvidia at length in last month’s newsletter). That works well when those companies are performing well, but when they take a downward turn they can bring everyone along for the ride.
Nvidia is down around 10% for the past month. Not to pat myself on the back, but I warned in last month’s update that it was firmly in bubble territory. It’s still up around 125% for the year (that’s not a typo), but any decline in this stock is going to affect the SP500 as a whole due to the weight that it carries.
Alphabet met its overall earnings target, but its ad revenue was down. This can be a bellwether, as companies pull back on advertising when they’re trying to cut costs and anticpating some unsavory times ahead.
Tesla is down 6% in the past month and is in the red for the year. They reported a 45% drop in profit in their most recent quarter.
The Economy is Showing Cracks
I held off on sending this email until the jobs report came in for last month. And it was a stinker. 114k jobs added (vs 185k expected). They also updated previous months: 216k added in May, 179k added in June, and 114k in July. Do you notice a trend? The unemployment rate also ticked up to 4.3%.
We’ve talked previously about how the Fed set interest rates high (and kept them there) to kill off inflation. Some cooling was expected, but the danger here is that things slow down TOO much. Once companies start cutting spending and laying off workers, the process doesn’t just immediately reverse if the Fed cuts rates a quarter-point. Reduced spending means less revenue for other companies and laid-off employees obviously have lower disposable income to plow back into the economy.
Does this mean we’re destined to topple into a recession? No. But the possibility is absolutely on the table. The odds right now are certainly much higher than they were 24 hours ago. The current plan is for the Fed to begin cutting rates in September and hope that things aren’t too bad before that finally happens. I have my doubts.
As always, don’t hesitate to reach out with questions. We’ll be reaching out with a mid-month update in a couple of weeks.