The Economic Crash of August 5th, 2024

According to U.S News, the New York Fed’s recession probability model implies a 55.8% chance of a U.S. recession sometime within the next year.

The idea of a recession in 2024 is somewhat abrupt – but predicting a recession is as accurate as predicting the stock market – one can never be fully sure. 

However, after the U.S. The Bureau of Labor Statistics (BLS) released a report detailing the economy’s job additions and unemployment rate, the market was sent into a frenzy.

(1) The Bureau’s Stated Unemployment & Job Growth

In July 2024, the BLS reported that the U.S. economy added 114,000 jobs. The expected figure was approximately 150,000, meaning that actual figure fell short. The decline in job growth led to increasing concerns about the labor market’s strength. Additionally, the BLS revealed in this report that the unemployment rate rose from 3.9% to 4.3%, signaling a notable increase. This was the highest unemployment rate the country has seen since October 2021, which was known to be a period in which the economy was still in recovery from the impacts of the COVID pandemic. 

High unemployment and slow job growth suggests that businesses are cutting back on hiring, a notable sign of economic trouble. This has led to expanding worries that these negatives could develop into overall lower consumer expenditure and decline in the rate of economic growth. 

(2) The Japanese Yen’s Carry Trade

To add on to the panicked state of the U.S, further turbulence erupted in Japan. The Nikkei 225, or Japan's leading stock index, plunged more than 12%. This decline was attributed to an unexpected appreciation of the Japanese yen, negatively impacting international investors. Investors who had used carry trades—borrowing yen at low interest rates to invest in higher-yielding assets—faced higher costs due to the yen's strength. This led them to sell off their investments, reducing investor confidence, causing significant declines in stock prices, and harming American tech companies that sell internationally.

This decline in Japan created ripple effects in the U.S. All three major market indexes experienced substantial harm, with the NASDAQ undergoing a 3.4% drop, Dow Jones lost over 1,000 points and the S&P 500 was reduced by 3%. Tech giants, such as Tesla, Nvidia, and Apple were hit especially hard, leading to broader impacts on the overall market. 

(3) The Current Situation

Following the severe stock market decline on August 5th, 2024, there has been a notable recovery. As of mid-August, major stock indexes have rebounded significantly. The Dow Jones Industrial Average has risen by over 2,000 points from its August low, while the S&P 500 and Nasdaq have gained 9% and 11%, respectively. This recovery is supported by stronger-than- expected retail sales, lower initial unemployment claims, and robust earnings from major companies like Walmart. 

Despite the rebound, markets remain below their all-time highs, and there are signs that the Federal Reserve may be less inclined to cut interest rates aggressively due to improving economic data.

(4) Recommendations for Investors

1. Stay Informed: It’s incredibly important to continue monitoring ongoing economic data and market trends to stay informed about market conditions and potential policy responses.

1. Diversify and Manage Risk: Ensure that your stock portfolio is diversified to mitigate the risks associated with market volatility. 

1. Focus on Long-Term Goals: Although short-term market fluctuations can be troubling, it is vital to maintain focus on long-term investment goals that can help navigate erratic periods. 

In summary, the August 5th crash revealed just how quickly markets can shift in response to economic news and currency movements. While the recent rebound brings some optimism, it's clear that the landscape remains unpredictable. As we move forward, focusing on adaptability and strategic planning will be key to navigating these turbulent times and capitalizing on emerging opportunities.