This blog is based on Business by the Numbers episode 130, “Navigating Market Volatility: What You Need to Know.” I’m your host, Hunt Demarest, CPA with Paar Melis & Associates. Today, we’re exploring the current state of the market. If you’re wondering why the market is reacting so strongly to recent reports, this episode is for you.
Understanding the Market Dynamics
Recently, we’ve seen a significant drop in the market. This was triggered by a bad jobs report and disappointing earnings from major companies like Amazon, Google, and Nvidia. The market is still tanking, and even pre-market indicators are showing negative trends.
The Federal Reserve plays a crucial role in this scenario. They control interest rates and money supply, which directly affect inflation. The jobs report is a key indicator for the Fed. When unemployment rises, inflation control becomes tougher, leading to increased market volatility.
Why Does This Happen?
The jobs report released last Friday showed higher unemployment rates than expected. The market was anticipating a 4.1% unemployment rate, but it came in at 4.3%. While a 0.2% difference might seem small, it had a significant impact on market sentiment. Investors were already on edge from previous bad earnings reports, and this news added fuel to the fire.
The Reality of Market Predictions
Predicting market movements is tricky. Even seasoned investors can get it wrong. Remember the Wall Street Journal’s experiment where monkeys picked stocks and often outperformed top investors? It highlights the element of chance in stock investments.
The current market isn’t a free market due to significant influence from the Federal Reserve. They control interest rates and money supply, which directly affects inflation and employment rates. This manipulation makes it difficult to rely solely on traditional market analysis.
Remember the Wall Street Journal’s experiment where monkeys picked stocks and often outperformed top investors?
The Magnificent Seven
A significant portion of market gains is driven by the Magnificent Seven: Microsoft, Apple, Alphabet (Google), Amazon, Nvidia, Meta (Facebook), and Tesla. These giants have seen massive growth, but recent poor earnings reports from some have shaken investor confidence. For instance, Nvidia, which has been a major gainer, reported disappointing earnings, causing a significant drop in its stock price.
These seven companies collectively represent over 25% of the total market value. When they perform poorly, the entire market feels the impact. For example, last week, while the overall market was down about 5%, the Magnificent Seven were down around 10%.
The SOM Rule
The SOM Rule, created by economist Claudia SOM, has a perfect record of predicting recessions. It states that if the unemployment rate over the last three months is more than 0.5% higher than the previous year’s average, a recession is likely. According to this rule, we might already be in a recession.
What Should You Do?
For business owners and individuals, it’s essential to stay informed and prepared. High interest rates may soon be a thing of the past as the Fed looks likely to cut rates to stabilize the market. This could mean lower mortgage rates and better loan terms in the near future.
Fed looks likely to cut rates to stabilize the market. This could mean lower mortgage rates and better loan terms in the near future.
Final Thoughts
The market is unpredictable, but understanding the factors at play can help you make informed decisions. Stay tuned for more updates and insights on navigating these volatile times.
Links:
https://finance.yahoo.com/news/stock-market-news-today-nasdaq-enters-correction-dow-falls-600-points-as-disappointing-jobs-report-shakes-investors-133048116.html
https://www.bls.gov/charts/employment-situation/civilian-unemployment.htm
https://www.marketwatch.com/livecoverage/jobs-report-for-july-employment-growth-seen-slowing-with-hurricane-providing-a-drag/card/the-sahm-rule-is-officially-triggered-tvQVLLwkOPdqTIA45gsP
https://www.reuters.com/markets/us/drop-magnificent-seven-could-drag-down-us-stocks-top-fund-manager-says-2024-07-30/
https://www.cnbc.com/quotes/.MAG7