Morning Wire XX
[0] A roller coaster week in the stock market that saw the steepest sell -off in decades, followed by an aggressive rebound, has renewed concerns about the health of the U .S. economy.
[1] In this episode, we talk with an expert about the economic factors playing into the turbulent week and how much the presidential race will influence the economy going forward.
[2] I'm Daily Wire editor -in -chief John Vickley with Georgia Howe.
[3] It's Saturday, August 10th, and this is an extra edition of Morning Wire.
[4] joining us now is Peter Earle, senior economist at the American Institute for Economic Research.
[5] Peter, thank you so much for coming on.
[6] Look, this week we saw a big sell -off in the stock market followed by a rebound.
[7] Can you put all of the events leading up to the sell -off into perspective for us?
[8] Certainly.
[9] So what we've really seen in the last few days is that we've gotten some economic data, which has, in totality, shown or suggested that the U .S. economy is in worse shape that we thought.
[10] In particular, we've seen a lot of bad news regarding U .S. labor markets and employment.
[11] The weekly and initial continuing claims have been rising, and they're above a level that usually suggests softness in the labor market.
[12] We've seen an increase in warn reports.
[13] That is the Worker Adjustment of Retraining Notification Act, where any company that has more than 100 employees has to warn employees that they're going to do layoffs.
[14] We've seen a rise in those.
[15] And last Friday, you know, we got the July unemployment report from BLA.
[16] that's Bureau of Labor Statistics.
[17] And the U3 number, which is the amount of the total labor market that's out of work rose much more than expected.
[18] It rose from 4 .1 to 4 .3%, which is much higher than expected.
[19] But more importantly, it triggered something called the sum rule.
[20] Now, the sum rule says that if the U3 number rises by a certain amount, with very few false positives, we are in or about to enter a recession.
[21] So that's a lot of what's weighing on the market right now.
[22] What are some of the factors playing into all of those negative indicators that you've just listed?
[23] Well, we're seeing that there's, of course, a rise in unemployment, but that's partially a result of a slow economy.
[24] It's also partially a result of growing concerns about uncertainty coming, whether because of what's happening overseas, Ukraine and Russia, things happening in the Middle East, tensions between the U .S. and China.
[25] I mean, also, interest rates are high.
[26] Inflation is still not down where the Fed wants.
[27] We have an election coming in the fall, so there's a whole bunch of factors, economic, social, and political, which are weighing on markets right now, and it's kind of given rise to a sort of a hair trigger where people would rather sell now and ask questions later.
[28] So they're getting out of an already extended stock market.
[29] Do you see any signs of a long -term problem or just more short -term trends?
[30] Whether or not this is a long - or short -term situation is going to depend upon upcoming economic numbers and what investors do.
[31] You know, in the last six to eight months, what we've seen in equity markets, in particular in the S &B 500, but in all the U .S. stock markets, is that the advance in stock prices, the advance in indices, was really being led by only a handful of stocks that came to be known as the Magnificent Seven.
[32] And because of that, you know, we have a whole bunch of other stocks.
[33] Most of the majority were either flat or even slightly down on the year.
[34] The hope is that the economic numbers, if the economic data proves to stabilize and maybe doesn't decline much more, that what we'll have is with these stocks coming down, there'll be sort of a turnover in leadership.
[35] Other stocks will sort of come to the fore and we'll have a more broad -based increase in stock prices.
[36] If that happens, then, yeah, that I mean, there's no reason why the stock market can continue on to forward and then maybe even newer heights.
[37] Another factor right now is earnings.
[38] Corporate earnings have not been that great.
[39] And in particular, in some of the big stocks, you know, we saw Apple, Microsoft, a lot of those companies revised their future estimates lower.
[40] And for that reason, yeah, it's time for some new stocks, new sectors to sort of come to the fore and lead the charge onto higher levels.
[41] I think the tech sector is kind of exhausted at this point.
[42] And what sectors of the economy do you think maybe are primed for that kind of upward action?
[43] If we continue to see weak employment numbers, softening labor markets, if consumers continue to feel pressure on their budgets because of interest rates remaining high and because of ongoing inflation.
[44] You know, the sectors we most likely see are the consumer sector, you know, foods, things that people sort of have to buy.
[45] We would see things like certain industrials rise, certain commodity -associated material stocks, things that represent sectors or goods and services that people have to purchase, whether or not the economy is slowing down.
[46] So foods, certain pharmaceutical or health -care -related stocks, that sort of thing, as opposed to more discretionary items, high -ticket or expensive items, that kind of thing.
[47] Those in tech are going to kind of have to take a breather while the economy goes to whatever it needs to go through to get back in shape.
[48] Now, you mentioned the Magnificent Seven earlier.
[49] Can you talk through a little bit about what we're seeing with them?
[50] That's Alphabet or Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
[51] What was troubling about their earnings reports?
[52] I mean, the one thing we can say about half of members of the Magnificant Seven is that the goods and services that they offer on the expensive side, you know, Tesla, Apple, that sort of thing, whereas Amazon is a consumer company that has very global reach.
[53] So we're seeing different things from all of them, but generally speaking, you know, their valuations have run up so much that in order to justify those valuations, their revenues would have to be very high.
[54] And I think what their companies are suggesting is that the revenues won't be high enough to justify those valuations, but they are also called into question by the withdrawal of consumers for whom the savings rate has dropped and their ability to consume is pretty constrained right now, given many of them are maxed out on credit.
[55] We've seen a rise in the 30 and 90 -day arrears payments and late payments on credit cards.
[56] So consumers, they're kind of tapped out of their pandemic savings and corporate revenues are going to have to reflect that sooner or later.
[57] Yeah, we've reported in the past on credit card debt hitting record levels.
[58] Where is the debt level at right now?
[59] Well, right now, the highest amount of ever of outstanding credit card debt is still the case.
[60] It's over a trillion dollars.
[61] What's been happening a lot is that, you know, people have been sacrificing, spending in other areas to make their payments.
[62] I think that two of the things we're going to see the Fed take into account, whether or not they say it or not, is not really the state of the economy, but also taking some pressure off of credit card borrowers by lowering rates.
[63] Now, just because the Fed lowers 25 or 50 basis points doesn't mean that the interest rates on credit card debt will necessarily lower that much, but they will decrease somewhat, and that could take some pressure off of borrowers.
[64] Now, will that pressure be enough to get them to start spending again?
[65] Will consumers start consuming with lower credit card rates?
[66] Probably not to an appreciable extent, but it all depends on what's happening elsewhere in the economy.
[67] If we continue to see unemployment rise, if we continue to see decreasing open positions, that should be still on the Joltz report, if we continue to see credit card rates subject to delinquencies and higher arrears rates, I don't think that we'll see rates on credit card debt come down much, and that's going to affect the whole consumption picture and, of course, the revenues of these companies.
[68] So it's all connected.
[69] It's all one big network of effects.
[70] You referenced the upcoming election as adding some volatility to the market.
[71] We heard the term Kamala crash at the beginning of this week after she became a favorite in the betting markets to win.
[72] At this point, did the two candidates really affect the stock market that much?
[73] At this point, I don't think so at all.
[74] I think the whole idea of Kamala Harris's emergence as the leading candidate that has very little to do with that what's happening in stock market right now.
[75] As we get closer to the election, and in particular, polling is very close, and in particular if either of the candidates have made very sort of stark announcements about their policies, then we might start to see effects in the stock market.
[76] But right now, what we're seeing in stock market is much more directly attributable to bad economic data and to more general worries about uncertainty going forward.
[77] We will see more directly related campaign effects as we enter mid -October or so.
[78] Final question.
[79] What aspects of the current economic situation do you believe are going underreported generally?
[80] I believe that the fact that the savings rate has fallen so much and that there's almost nowhere left for consumers to spend other than that of current income.
[81] And, you know, of course, they're facing at the same time, they're facing higher mortgage rates, higher rents, higher food prices.
[82] I think the fact that the consumer is pretty much out of gas is something that has not been, not much been said about it.
[83] It may become more of a factor as we enter September, October, but that's something that I'm going to have a close eye on because, you know, we've seen everything from buy now, pay later plans to consumers shifting away from durable goods purchases.
[84] It seems very much like consumers are, they don't have much left that's discretionary, and they're kind of playing a shell game in terms of determining how much they're going to spend on what.
[85] into areas.
[86] So that's something that could very quickly hit the economy in addition to rising unemployment and sort of softening business conditions.
[87] Something will certainly keep an eye on.
[88] Thank you so much for talking with us.
[89] It's my pleasure.
[90] Thank you so much.
[91] I hope you guys have a great day.
[92] That was Peter Earle, Senior Economist at the American Institute for Economic Research, and this has been an extra edition of Morning Wire.