The year started out with a bang!  From the start of the year to mid-July 2024, the S&P 500 gained 19.5% and the Nasdaq QQQ gained 25%.  Since then, and including today’s sell-off, these indices gave up 8.3% and 13.5%, respectively.  What a reversal!  What could lead to the pullback we’re seeing in the stock market these last few trading days?

The most direct cause is the July unemployment rate announced last Friday.  The Bureau of Labor Statistics announced that the U.S. economy added less jobs than expected in July, and the unemployment rate increased to 4.3% from 4.1% in June.  Why would a modest increase in unemployment cause a major sell-off?  Because the stock market is reactionary in the short-term, and fear is rearing its head.  Stocks are declining because investors fear a recession is approaching and that the Federal Reserve might be too slow in lowering interest rates.

Is A Recession Coming?  A recession doesn't appear to be imminent based on the data points we have at the moment.  While July’s unemployment rate is higher than anticipated, it is still lower than the long-term average rate of 6.2%.  

The number of job openings remains significantly higher than long-term averages, and the projected second quarter U.S. GDP growth rate is a healthy 2.8%.

While the recent unemployment data might be the catalyst for the current stock market pullback, from a big picture perspective, much of this reversal may be just a natural pause in the stock market advance.  As we discussed in our recent blog, the market is taking a “breather” from its recent highs.

Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm with locations in Santa Monica, CA serving clients throughout Southern California and the United States.

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