As summer fades away, school bells ring once more, and weekends are dominated by football games. This transition signals a pivotal moment—an occasion to reflect on our circumstances and to make crucial decisions for the upcoming months.
As we enter September, it’s clear that a challenging financial landscape lies ahead. Stock prices sit near their historical peaks, yet overall valuations exhibit unnerving highs marked by underlying economic frailties.
Recent data reveals that U.S. manufacturing has seen a downturn for five straight months and 21 out of the last 22 months, as per the latest report by the Institute for Supply Management (ISM). This decline is highlighted in their Manufacturing PMI for August, which reported a PMI of 47.2. A figure below 50 represents contraction within the manufacturing sector, which contributes to 10.3 percent of the economy. Notably, sectors such as machinery, textiles, chemicals, and transportation also reported declines.
The manufacturing output sub-index fell to 44.8, the lowest since May 2020, when pandemic-induced lockdowns were at their height. The ISM indicated that this low production level is “putting additional pressure on profitability.”
Despite the weak demand, manufacturers are still facing increased costs for inputs, partly due to escalating freight charges. This combination foreshadows a potential scenario of stagflation, where prices surge while economic growth stagnates.
A Troubling Trend
For workers, stagflation means either job loss or reduced hours while grappling with rising living costs. This creates a dire situation where remaining employees experience a declining quality of life, and those who lose their jobs face potentially irreversible setbacks.
This economic environment complicates the anticipated interest rate cuts from the Federal Reserve. There’s typically a considerable delay between when rate cuts begin and when their impact is felt throughout the economy.
If the Fed initiates cuts following the FOMC meeting on September 17 and 18, any positive effects may not be realized until mid-2026. Consequently, the economy could continue to contract even as these cuts are implemented, which may also lead to a decline in stock prices.
Moreover, consumer price inflation remains above the Fed’s targeted 2 percent. Reducing rates introduces the risk of renewed price surges, putting the Federal Reserve in a precarious position—forced to raise interest rates again to combat inflation, which would further strain the economy.
At a minimum, lowering rates could trigger new price anomalies. The cheaper credit might encourage individuals and businesses to borrow for expenditures they typically couldn’t afford—like substantial home loans or stock buybacks, despite stagnant growth. Economists might misinterpret this as a signal of economic recovery rather than a precursor to future turmoil.
Escalating Tension
The realization that the Fed’s expected rate cuts are not a panacea intensifies the conflicting emotions of fear and greed in the stock market.
Fear arises from acknowledging that the economy is faltering, which is precisely why the Fed is lowering rates. Conversely, there’s greed driven by the belief that these easier credit conditions will funnel borrowed money into the stock market, driving share prices higher. This dichotomy creates an atmosphere filled with anxiety.
Recall that on August 5, the Dow Jones Industrial Average (DJIA) plummeted over 1,000 points in one day, only for panic to quickly dissipate as brokers encouraged buyers to seize the moment. Then, on September 3, after a month-end rebound, the DJIA fell by more than 600 points, with NVIDIA alone suffering a 9.5 percent drop, equating to a $279 billion drop in market value.
Such volatility signals investor unease. It seems the bubble may be bursting. The initial catalyst for the August 5 drop was an interest rate increase by the Bank of Japan on July 31, which adversely affected the yen carry trade. The recent downturn might have been sparked by the Justice Department’s antitrust subpoena issued to NVIDIA on September 3, although the ultimate implications remain to be seen.
However, there appears to be a deeper issue at play beyond an antitrust investigation. The exuberance surrounding AI stocks may have overtaken rational expectations over the last two years, resulting in a dwindling pool of new investors willing to buy at current prices, forcing sellers to lower their asking prices.
Reality Check: September 2024
AI technology holds vast promise, yet at its current valuation, major AI stocks are far from appealing investments. An increasing number of investors seem to be opting to exit the market and weather the remainder of the year in a more conservative stance.
As time unfolds, we will ascertain whether the bubble has indeed burst. If the bullish forces stage a recovery in the coming weeks, it may represent a prime opportunity to divest. Such prices may not be available for many years to come.
The history of significant market corrections shows that recovering to new highs can take decades. For instance, after hitting a peak in September 1929, investors had to wait nearly 30 years, until late 1958, to recover their losses. Similarly, following the tech boom in early 2000, the NASDAQ took over 17 years to reach a new all-time high.
Consider the implications if your investments were to languish in a bearish market for the next 5, 10, or even 20 years. Would you maintain your positions or panic and sell at the worst moment, securing a substantial loss?
Now is the time to contemplate these questions. Liquidating your entire stock portfolio overnight may be impulsive, but positioning yourself for future opportunities by freeing up some cash could be wise.
This September offers a sobering reality: we are likely witnessing the end of a significant stock market bubble, and cuts in Fed rates will not sustain it.
[Editor’s note: It’s remarkable how a few strategic decisions can significantly alter one’s financial future. At this moment, I am preparing to make such a decision. >> I’d like to share this opportunity with you.]
Sincerely,
MN Gordon
for Economic Prism
