🔨 Weak labor market

and stocks enter correction territory

Good morning investors! Things are not looking too rosy. Stocks are going down and even BTC is now under $50,000 as investors fear a recession.

Today we cover:

  • The job report.

  • Global tensions.

  • Stocks enter correction territory.

📊 Economy and News 

What the job report says

Last month’s job growth was far softer than anticipated, and the unemployment rate surged to its highest level since October 2021.

July’s surprisingly low employment gains of 114,000 and the unexpectedly high 4.3% jobless rate painted a picture of a significantly weaker job market, raising concerns about a potential recession.

Missing the mark: Economists had expected payroll gains of 175,000, according to FactSet, and predicted the unemployment rate would remain steady at 4.1%. However, the data revealed a different story, indicating potential widening cracks in the labor market.

Despite these troubling signs, there were still indications that the job market remains on relatively solid footing—for now.

Fed’s mistake? Friday’s report, has raised questions for the Federal Reserve. As inflation has slowed, the Fed has become more sensitive to any weakening in the labor market. Despite this, it opted to hold interest rates steady on Wednesday.

These latest numbers cast doubt on whether the job market can maintain stability until and after the first interest rate cut, expected in September, given the lag in monetary policy effects.

Dissecting data: Over the past three months, job gains have averaged 170,000, which is higher than the average monthly job growth seen in 2019. Moreover, July’s 114,000 gain is not the lowest monthly increase this year; April saw only 108,000 net jobs created after downward revisions. Nonetheless, July’s figure is the second-lowest monthly gain since December 2020.

Until June, when it rose to 4.1%, the nation’s jobless rate has been at or below 4% for 30 months.

Economists expected it to hold steady, but instead, it increased for the fourth consecutive month, reaching 4.3%.

Historically, 4.3% is not alarming, but the recent rapid rise is concerning. This increase triggers the "Sahm rule," which suggests a recession is imminent if the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its prior 12-month low.

Don’t jump the gun: Many traditional economic rules have been challenged in the post-Covid economy. Even Claudia Sahm, the economist who created the rule, cautioned this week that triggering it may not necessarily indicate a recession.

Global hits:

Global unrest: There is unrest all around the world. Thousands of Venezuelans marched across the South American country on Saturday over its contested election. The country has been in turmoil since the election. 🇻🇪 

Venezuela’s electoral authority, blasted by critics as favoring the ruling socialists, has proclaimed Maduro the winner in last Sunday’s vote, saying on Monday he obtained 51% compared to 46% for opposition candidate Edmundo Gonzalez. The authority reaffirmed a similar margin on Friday.

Things are worsening in Europe as well as the UK as rioters attacked a hotel used to house asylum seekers in the UK town of Rotherham on Sunday, as the country faces the worst social unrest it has seen in years. 🇬🇧 

However, most eyes are on the Middle East. The US, UK and France are among several countries urging their citizens to leave Lebanon as heightened tensions in the region spark fears of a widening Middle East conflict. 🇮🇱 

Some airlines have once again cancelled flights to Israel and some neighboring countries. Plus, the US is still not sure if Iran will enter the war. 🇮🇷 

Lastly, the situation in Bangladesh is going out of hands. The government has imposed a curfew to control things. Some experts argue that this might disrupt supply chain as well since a large number of international companies now get their products produced in the small nation. 🇧🇩 

Mortgage rates fall: Mortgage rates have fallen to the lowest level in more than a year after weak employment report. The average rate on the popular 30-year fixed mortgage dropped 22 basis points to 6.4% Friday. The recent high on the 30-year fixed mortgage was 7.52% in late April, and home sales have been falling ever since.

📈 Stocks

S&P 500 5,346.56 (-1.84%)
DJIA 39,737.26 (-1.51%)
NASDAQ 16,776.16 (-2.43%)
BRENT CRUDE 76.81 (-3.45%)
* Prices as of Aug 5th, 12:20 AM UTC

Stocks enter correction territory

Stocks fell sharply on Friday after the job report. Some megacap names saw steep losses during the day, as Amazon’s second-quarter results sparked investor concerns about Big Tech’s blowout levels of artificial intelligence-related capital spending.

The e-commerce giant slid -8.8% after missing the Street’s revenue estimates and issuing a disappointing forecast. Intel, meanwhile, cratered -26% on Friday.

Intel, in fact, had its biggest drop since 1974 after the chipmaker reported a big miss on earnings in the June quarter and said it would lay off more than 15% of its employees.

The stock plummeted -26% to $21.48 at the close. It was the second worst day ever for the shares, behind only a 31% drop in July 1974, which was three years after Intel’s IPO. The company’s market cap is now below $100 billion.

The stock is trading at its lowest since 2013. Asian names including Samsung and TSMC closed lower, with European chip firms such as ASML also dropping.

This caused the broader market to fall as well. The Nasdaq is the first of the three major benchmarks to enter correction territory, down more than -10% from its record high.

Friday’s declines are a “natural course” in a bull market that is reverting after its steep uptrend, LPL Financial chief technical strategist Adam Turnquist said.

But it was more than just technology stocks that saw selling on Friday. Bank stocks were slammed on the recession fears with Bank of America off -4.9% and Wells Fargo down -6.4%.

Surprising: Warren Buffett’s Berkshire Hathaway cuts stake in Apple by nearly 50%.

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💵 Personal Finance

Read this if you owe student loan

The Biden administration is reaching out to tens of millions of borrowers about its new plans to cancel student debt. The Department of Education estimates that at least 25 million borrowers could qualify for this relief.

Eligibility: The department's email to borrowers outlines four categories of eligibility:

  • Borrowers who owe more than they did at the start of repayment.

  • Borrowers who entered repayment on their undergraduate loans on or before July 1, 2005, or on their graduate loans on or before July 1, 2000.

  • Individuals already eligible for student loan forgiveness under existing government programs who have not yet applied.

  • Students from “low-financial value” programs.

You do not need to send an application to be eligible. However, borrowers who wish to opt out of the debt forgiveness must do so by August 30 with their loan servicer.

Final Rule and Implementation: The Education Department is expected to publish its final rule on debt relief in October. Following this, the department aims to cancel loans quickly to preempt potential lawsuits, according to Luke Herrine, an assistant professor of law at the University of Alabama.

Tax Implications: Student loan forgiveness is federally tax-free through 2025, thanks to a provision in the American Rescue Plan Act of 2021. However, some borrowers might still face state tax liabilities.

💰 Be a Better Investor

“Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage.”

Thomas J. Stanley

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👩🏽‍⚖️ Legal Stuff
Nothing in this newsletter is financial advice. Always do your own research and think for yourself.