The Dow Drops 1400 Points.

The Dow Drops 1400 Points.

After the Feds Signal a September Rate Cut and Unemployment Rises.
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On July 31, 2024, the Dow Jones Industrial Average started out strong, rising 384 points from the open until 2:45 pm ET. However, as the news spread (during the Jerome Powell press conference) that a September interest rate cut was on the table, the sellers dominated the rest of the day, trimming the gains back to 106. On August 1, 2024, stocks retreated further with the DJIA dropping almost 500 points. Today, after a job report showed unemployment had ticked up to 4.3%, stocks dropped further – showing a decline of another 907 points in the DJIA in the first two hours of trading on August 2, 2024.
 
Isn’t a rate cut what everyone has been waiting for? Why the sell-off? What does this mean for investors for the rest of 2024, and what is our best move for both stocks and bonds as we enter a cycle of potential rate cuts?  
 
Below are the points we’ll discuss in this blog.
 
25 or 50 Basis Points?
Data Dependent 
Apple & Amazon Earnings
Why are the Feds Considering a Cut & What Does it Mean for Stocks & Bonds? 
Best Strategy for Stocks 
Best Strategy for Bonds 
 
And here is more color on each point.
 
25 or 50 Basis Points?
Jerome Powell usually sticks pretty close to his talking points and script. However, he was a little bit lively, for him, at the most recent press conference. Powell was fairly emphatic that it would be a 25 basis point cut, if a rate cut takes place, which he repeatedly noted wasn’t a guarantee. He said that there weren’t any discussions of 50 basis points at this juncture. Despite that assertion, 80% of the futures pointed to a 50 basis point cut on August 2, 2024 (source: CME FedWatch).
 
Data Dependent 
Last year, we had had several months of data showing that inflation was coming down to the 2% target range. And then in the first quarter of 2024, inflation ticked up again, and was once more of concern. In the second quarter of 2024, inflation looked like it was moving down again, from a peak of 7% to 2.5% (source: Federal Reserve). If inflation looks to be stabilizing closer to the target rate of 2%, then the Feds will have greater “confidence” (a key word) that a rate cut won’t raise the specter of inflation again.
 
One of the reasons that a rate cut could be on the table is to make sure that the employment situation continues to normalize, rather than have a troublesome jump in unemployment. Maximum employment is the 2nd leg of the Federal Reserve Board’s dual mandate.
 
Rate cuts are needed to make sure that unemployment doesn’t get too high and a recession doesn’t become too problematic. A tight monetary policy is needed to make sure that prices remain stable. So it is a very delicate dance to get the formula right. These facts were stressed repeatedly by Jerome Powell. As Powell admitted in the July 31, 2024 press conference, “certainty” isn’t a word that is used in economics.
 
Apple & Amazon Earnings
Apple and Amazon earnings were announced today, August 1, 2024, after the market closed.
In the June 2024 quarter, Apple’s revenue was up 5% year over year, while net income improved by almost 8%. The new AI smart phone may be partially responsible, as is customer loyalty and satisfaction (per CFO Luca Maestri). All geographic regions had increased sales, with the exception of Greater China, which fell by -6.5%. (I explained why China Apple sales are expected to drop in January of this year, in my “Is Huawei the Apple of China’s Eye?” blog.) Asia Pacific had the strongest revenue growth at 13.5%. The Mac, iPad and Services segments were strongest, with revenue growth of 2.5%, 23.7% and 13.7%, respectively.

Amazon’s revenue was up 10%, and net income doubled, from $6.7 billion last year to $13.5 billion in the 2nd quarter of 2024.
 
Labor market conditions wax and wane on business conditions. So, when Apple and Amazon show continued strength, the Feds will take note. The increased revenue and net income in these two trillion dollar+ companies would argue against a rate cut. However, they are not the only companies in the S&P500, and even given the welcome news in these earnings reports, both companies were down in afterhours trading.  
 
Why are the Feds Considering a Cut & What Does it Mean for Stocks & Bonds? 
The Feds are considering a rate cut because, according to Jerome Powell at the July 31, 2024 press conference, “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate, but we’re not quite at that point yet.”
 
Rate cuts occur when policymakers are trying to stoke growth and limit the detrimental impact of a recession. During 21st Century recessions, there have been dramatic (terrible) declines in stock prices. Sophisticated investors know this. The mood among Wall Street whales in July was one of profit-taking and reallocating out of large caps and into small caps, which rose 10.71% in the month (source: S&P Dow Jones Indices).
 
Rate cuts are perceived as good for the bond market because lowering interest rates should, in theory, increase the value of existing bonds and make it easier for companies to borrow money more affordably. However, the policy interest rate is only part of a more complicated story. There is still elevated credit and duration risk. Additionally, long-term bonds lost more than stocks did in 2022, and did not make up those losses in 2023.

​

​Bonds earned gains in the Dot Com and Great Recessions, providing safety from the sizeable losses of stocks (-78% in the NASDAQ Composite Index in the Dot Com Recession, and -55% in the Dow Jones Industrial Average in the Great Recession). However, even if there is a slight increase in bond value after a few interest rate cuts, it’s unlikely that bond gains are going to erase the sizable paper losses of 2022. Interest rates are not projected to bottom out at zero, like they did in the wake of the Great Recession. Rather, the longer run projection for the Fed Fund rate is 2.8%.

As a reminder, we began pointing out that we weren’t getting paid to take on the risk in bonds starting in the Great Recession and continuing through 2021. We encouraged people instead to lean into real estate between 2009 and 2015, and to always rebalance for a properly diversified portfolio with stocks and cash liquidity. 
 
Today, we can make a 5% gain on the safe side of our plan, but it’s tricky. We’re getting a higher yield on short-term over long-term bonds. (So, we’re rewarded for taking on less risk.) Since creditworthiness is a problem, we have to know how to navigate between high credit quality, short term issuances, and speculative companies that want to keep our money for decades. Join us for our Bond & What's Safe Master Class on Oct. 26, 2024 to learn more. (Prerequisite: a Financial Freedom Retreat.)
​
It’s very important to remember that paper losses can be real. Many terms are longer than our own lifespan. And with the low credit quality in today’s world, the longer the term, the higher the risk that the company will have to restructure before they pay us back. I’ve been hearing a lot of pernicious rhetoric that clients are receiving with regard to the return on their managed portfolios, where “paper” losses are glossed over and not included in the calculation. The truth lies in the brokerage statements – which many of us never read (or don’t know how to read). It’s quite important for us to understand exactly what we own and why, and to be the boss of our money instead of having blind faith in whatever we’re being told. It’s a better idea to fix the roof while the sun is still shining. Everything gets more difficult when the economy slows down or hits a recession. While a recession isn’t forecast for 2024, 2.1% GDP growth is pretty anemic growth, particularly given the elevated prices of stocks and the alarming levels of debt.
 
Best Strategy for Stocks 
We’re overweighting 20% safe in our sample pie charts based on the elevated risk of equities. Stocks are expensive. GDP growth is expected to be lower this year than last year. There’s a lot of political uncertainty in the world. Now would be a great time to do our rebalancing to make sure that our wealth plan is age-appropriate, properly diversified, and that we capture gains near an all-time high. (We have a free web app for you to personalize your own sample pie chart. Email [email protected] with FREE WEB APPS in the subject line for a link.)
 
Best Strategy for Bonds 
Keep the terms short and the credit quality high. Under that umbrella, if you want to add a little duration, maybe two years, but under five years, be sure that all of the other safety nets are in place, including high credit quality and FDIC coverage (in bank products). I would also have rolling maturity dates. I would be mindful of the fine print, and understand what risks I was taking in any “safe” fixed income product. Remember that over half of the S&P 500 is at or near junk bond status, and that includes a lot of banks, brokerages, insurance companies, fund companies, fintech companies, etc.

Source: Treasury.gov

As you can see in the above par yield table of U.S. treasuries, investors are getting paid more for short duration than for long.
 
Bottom Line 
The FOMC is considering a rate cut in September because the economy is slowing down, unemployment is creeping up, and inflation seems to be abating. All of those are signs of a soft landing that could indeed become a recession if they don’t get all of their calculations right. Because market conditions lag policy action, the FOMC always wants to be ahead of trends, rather than behind them. Likewise, when investors wait for the headlines, it’s too late. As you can see in the charts below, the recession announcement comes long after Main Street has lost a substantial part of their portfolio.
​
​With this in mind, it’s important to have a defensive strategy in both stocks and bonds, and not rely upon the idea that a rate cut is going to fix everything. There’s just a lot more to the story in today’s Debt World.

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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is are the most recent releases of these books. Follow her on Instagram. 
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Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.​

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.