The Stock Market Loses 10% in 22 days- (Why that’s actually not a bad thing)

In July 2024, the Stock Market decreased by 5-10%, meaning the value of many companies' stocks went down. The NASDAQ, or the subset of the Stock Market that is comprised of Technology Stocks like Google, Tesla, Amazon, Netflix, and Nvidia, fell 10% in the month of July. The S&P 500 (the 500 largest companies in the U.S.A.) fell 5.6% in the same time period. This happened for a few key reasons- including disappointing earnings reports from major Technology companies, the Unemployment Rate increasing, and numbers showing that the U.S.A. economy is not growing as fast as expected.

While these market declines reflect investor sentiment and activity on Wall Street, they don’t necessarily capture the ongoing financial struggles faced by everyday Americans. Around 80% of Americans reported stress over the cost of living, and 56% felt they were underpaid. Additionally, more than half of Americans indicated that they would run out of money within a month if they lost their income, with 29% saying their savings would be depleted within a week. This highlights the continued impact of inflation on the middle class.

In July 2024, the U.S. unemployment rate rose to 4.3%, marking its highest level since January 2022. This increase in unemployment was a significant factor contributing to the stock market's decline during the same period. A higher unemployment rate generally indicates that fewer people are working, which can slow down consumer spending and weaken overall economic growth.

The rise in unemployment also reflects broader economic challenges. For instance, many companies, particularly in the technology sector, have been reporting disappointing earnings. These earnings shortfalls led to job cuts, particularly in industries that had expanded rapidly during the pandemic but are now facing a slowdown.

The Federal Reserve’s aggressive interest rate hikes, aimed at combating persistent inflation, have also contributed to this uptick in unemployment. Higher interest rates make borrowing more expensive for businesses, leading to reduced investments and, consequently, job cuts. While these measures are intended to cool down the economy and bring inflation under control, they come with the side effect of higher unemployment, as seen in July 2024.

This increase in unemployment is particularly concerning for the average American, who is already grappling with rising living costs. Many Americans report feeling financially strained, with a significant portion indicating that they are just one paycheck away from financial hardship. The combination of rising unemployment and ongoing inflationary pressures suggests that many households could face even greater financial stress in the coming months.

In response to these economic conditions, the Federal Reserve has raised interest rates to their highest level in 24 years, aiming to combat inflation by slowing down the economy. While this approach has led to higher unemployment and declining stock markets, it is also expected to reduce inflation over time. The hope is that once inflation is under control, interest rates may eventually be lowered, stabilizing the economy. Stock Market declines and the increasing Unemployment Rate are actually a good sign for the Economy- here’s why: higher interest rates cause the economy to slow down, decreasing inflation. You might be reading this saying, “But people are losing their jobs!” and, “My 401(k) balance went down!” and, “Why are we rooting for the economy to slow down?”- all valid sentiments. This is what the Federal Reserve is trying to do, on purpose to slow inflation. The truth is not pretty- but that’s economics. What happened in July is a good indicator of Interest Rates coming down soon- We Shall See.