4 reasons why the economy looks like it’s collapsing – and what to do about it

Almost anyone who wants to find a job can find one. The economy is so hot that prices are rising faster than at any time since the 1980s. The housing market is on fire. Consumers are spending like crazy.
However, we keep hearing the word “recession” like it’s 2007 again. What gives?

The truth is that we are probably not in a recession right now (although it is possible), but there are many signs that one is just around the corner.

Sign 1: The Fed Raises Rates

Inflation has been rampant, and the Fed’s tool for dealing with rising prices lies in its ability to charge higher interest rates. This makes borrowing more expensive and slows down the economy—intentionally.

The problem is that the Fed was super-duper late in raising rates. Inflation was a growing concern throughout 2021, but the central bank only started raising rates in March 2022. Thus, the Fed needs to catch up and take much stronger action than if it started raising rates last year.

The Fed raised rates by half a percentage point last week, the biggest single rate hike in 22 years.

Fed Chairman Jerome Powell said this month that the central bank will continue to raise rates by half a percentage point at the end of each meeting until it is satisfied that inflation is under control, and then the Fed will continue to raise rates by a quarter of a percentage point for some that time.

The Fed is convinced it can raise rates without plunging the economy into recession. But this so-called “soft landing” has proved elusive in the past, and many Wall Street banks believe the Fed will trigger a recession to beat inflation.

Sign 2. The stock market is in the mode of selling everything

Extreme fear is the prevailing mood on Wall Street this year. The CNN Business Fear and Greed Index is just six out of 100.
More than $7 trillion has been withdrawn from the stock market this year.
After hitting record highs in early January, the stock market lost almost a fifth of its value – stocks fell almost into bear market territory. Nasdaq (COMP) already deep in a bear market. Over $7 trillion has evaporated from the stock market this year.

Worried that higher interest rates would cut into profits for companies, investors decided to leave.

This is bad news for people’s retirement plans. It’s also bad news for a number of investors who rely on the market for income, including intraday traders who have been counting on the stock market’s near-total rally for the better part of a decade. And that’s not good for consumer sentiment.

While a minority of Americans actively invest in the stock market, when they see the red sea next to a CNN ticker or on their phone screens, it has historically made people think. In May, consumer sentiment fell to its lowest level in 11 years.

This is potentially bad news for the economy, as consumer spending makes up more than two-thirds of America’s gross domestic product.

Sign 3. Bond market

When investors are not so hot in stocks, they often switch to bonds. Not this time.

Safe US Treasuries are selling off. When bond prices fall, yields rise, with 10-year Treasury yields topping 3% this month for the first time since 2018.
How long will inflation last?  The answer lies in the past

This usually happens when the Fed raises rates – a higher cost of borrowing makes bonds less valuable at maturity, so a higher bond interest rate (yield) will help offset this and make them more attractive to investors.

Bonds also sold off as the Fed decided to roll back its huge portfolio of Treasury bonds it bought in the wake of the pandemic to prop up the economy.

As bonds sold and investors became more fearful of the economic downturn, the gap between short-term and long-term bond yields narrowed. The 2-year Treasury yield briefly outperformed the benchmark 10-year bond in March for the first time since September 2019. This so-called yield curve inversion has preceded every recession since 1955, resulting in a “false positive”. once, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the globe

None of this happens in a vacuum. Russia continues its deadly invasion of Ukraine, which has cut off supply chains and sent energy prices skyrocketing. China continues to lockdown some of its largest cities as the number of Covid cases remains high. And labor shortages have pushed up wages and prevented the normal flow of goods around the world.
Russia continues to threaten European countries by cutting off energy supplies, which could lead to a recession in the EU economy. China’s economy has slowed sharply as workers stay at home as part of their anti-coronavirus policy.

What happens abroad could spread to the United States, hurting the American economy at the most inopportune moment.

What to do

So, a recession is coming soon. That’s what No do: Panic.
Even if a recession is inevitable, there is no telling how severe it will be. But it never hurts to prepare for the worst. Here are a few ways financial advisers say you can insulate your finances from an economic downturn.

Commit a new job right now: With ultra-low unemployment and plenty of vacancies, this is a market for job seekers. This can change quickly during a recession.

Capitalize on the housing boom: If you’ve been thinking about selling your home for a long time, now might be a good time to make a list. Home prices in the United States are up nearly 20% year on year, but mortgage rates are also rising, ultimately dampening demand.

Set aside some money: It is always a good idea to have liquid assets—cash, money market funds, etc.—to cover immediate needs or unforeseen situations.

Finally, some wise advice for any market: don’t let your emotions get the better of you. “Don’t invest, stay disciplined,” says certified financial planner Marie Adam. “History shows that what people — or even experts — think about the market is usually wrong. The best way to reach your long-term goals is to just keep investing and stick to your allocation.”

– Allison Morrow of CNN Business and Jeanne Sahadi contributed to this report.

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