Elm3’s Economic Outlook for August 2024
As we round out the summer and head into election season, we have begun to see market volatility. On Friday, August 2nd, the S&P 500 and Nasdaq declined 2.4% and 1.8%, respectively, and the markets opened in the negative on Monday, August 5th. With investors seeing red on their screens, many have begun to feel nervous. What does this market decline mean?
U.S. markets declined on Friday when jobs data underperformed expectations. July saw fewer jobs added to the market than anticipated, and the unemployment rate rose to 4.3%. The rise in unemployment triggered something known as the Sahm Rule. The Sahm Rule suggests we will hit a recession after the three-month moving average of the unemployment rate rises 0.5% in a 12-month period. With the increase in the unemployment rate in July, the so-called Sahm Rule has been triggered.
While such is certainly bearish news, analysts caution investors from panicking. For one, the Sahm Rule is based on a relatively small sample size of domestic recessions, suggesting the rule could be based on chance more than anything else. Further, unemployment data is drawn from household surveys, responses to which have dwindled over time. Comparatively, payroll employment numbers, which are derived from a survey of businesses, are up 1.6% year over year. The strength in domestic GDP growth also points to health within the United States economy.
All this being said, we suggest taking the underwhelming jobs data with a grain of salt. As we look into the fall, we will be watching the Fed, which is expected to cut interest rates in September. Inflation has been declining since March, and if this decline continues, the Fed could offer a reprieve to the US economy by lowering rates and easing the cost of borrowing.
In the meantime, investors could look into buying undervalued stocks and sectors. While the past cannot predict the future, small-cap stocks have historically performed strongly during falling rate environments. If the Fed does cut rates in the fall, investors could look into their style box exposure and diversify into the small-cap arena. Depending on your financial circumstances, investors may also find it helpful to pursue a bucket-style of investing. Short-term needs are invested in cash, medium-term needs are invested in fixed income securities and cash equivalents, and long-term needs are invested with an eye on growth.
Regardless of your life circumstances, the Elm3 Financial team would be happy to support you in managing your investment portfolio. Click here to learn more about our services and contact our team.
