What Does the Stock Market Plunge Mean?

In 1992, a strategist for Bill Clinton’s presidential campaign coined a phrase. We’ve heard it many times since then. 

Jim Carville was aiming this phrase – “It’s the economy, stupid” – at Clinton campaign workers. He was telling them to focus their messaging on the economy.

Why? Because the economy is almost always the top issue for voters. Including during this election year. Lately, the economy has been anything but good.

Just nine days ago, the Dow Jones Industrial Average plunged more than 1,000 points. The NASDAQ Composite fell 3.5%. And July’s unemployment rate shot up 4.3%, a three-year high. 

Americans were already nervous about their finances. We’re hoping this is not the straw that breaks the camel’s back. In the meantime, it might be a good idea to avoid looking at your 401k retirement account for a while.

Tumbling But Not Crashing?

Please note – this is not a stock market crash. There have been plenty of wild swings in the Dow Jones before. In both directions. The pendulum usually slows down after a while. 

But the volatility during an election year is concerning. And it’s not just in America. That same day, August 5, Japan’s Nikkei 225 index plummeted by 12%. That was its worst-ever nosedive.

And all major Asian and European markets also tumbled significantly. What caused selloffs in the U.S.? Financial analysts say three things are responsible. 

One is increasing fears about a potential recession. Another is worry that the Federal Reserve hasn’t acted quickly enough. And there is concern that the big investments some companies have made in artificial intelligence (AI) might not pay off. 

Prices & Jobs Report Spark Concerns

Why are Americans worried about the economy? Well, anyone who has shopped at a grocery store lately knows. And anyone who has filled up their gas tank lately knows. Wage growth is also at its lowest in more than three years.

Most U.S. financial experts tell us our economy is strong. They point to solid consumer spending as evidence. And to the fact that the economy grew more than expected during the second quarter of this year. 

But the recent jobs report revealed the U.S. economy added only 114,000 jobs in July. That’s far below the predicted figure of 175,000. And the unemployment rate grew. 

As a result, economists at Goldman Sachs raised the odds of a recession within the next 12 months to one in four. That’s still not high, but it is a jump.  

Artificial Intelligence Is Underperforming

What does AI have to do with the economy? Plenty. Many businesses have invested in it. They were banking on it creating a global industrial revolution. And many people invested in those companies. Such as Apple, Microsoft, Meta, Amazon, and others.

Now, those big bets could still pay off. But right now, profits for this unproven technology are nowhere to be seen. Many traders are ditching AI stocks.

Berkshire Hathaway CEO Warren Buffett is one of them. He recently unloaded one-half of Berkshire’s Apple stake. That’s not exactly good news for the tech sector. 

And those companies that have invested heavily in AI? A number of them are huge corporations. So, they represent a substantial percentage of the S&P 500. When they suffer losses, so does the overall market.

Preparedness Quells Recession Worries

If there is a silver lining to the grim economic news, it’s this. It will probably influence the Fed to cut interest rates in September. 

Lower borrowing costs (mortgages, car loans, credit cards, etc.) should spark more spending. Some are blaming the Fed for not doing this sooner.

The next jobs report will come out before the Fed meets again. And that will probably be a factor in how much they lower interest rates. 

Regardless, Americans will continue to worry about a possible recession. Even if the stock market rebounds, we have an uncertain future ahead of us. 

As with all the concerns we’ve voiced in the past, the answer is preparedness. We may need to cut back on some expenses, but we should never cut back on what we need to face this uncertain future. Because those preparedness items will be there when we need them.