4 reasons why the economy seems to be collapsing – and what to do about it

4 reasons why the economy seems to be collapsing – and what to do about it

Pretty much anyone who wants a job can have one. The economy is so hot that prices are rising faster than ever since the 1980s. The housing market is on fire. Consumers spend like crazy.
However, we still hear the word “recession” as if it were 2007 again. What does it give?

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

Sign 1. The Fed has hiking rates

Inflation has been rampant and the Federal Reserve’s tool for combating rising prices is its ability to set interest rates higher. This makes borrowing more expensive and slows down the economy – deliberately.

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The problem is that it’s too late for the Fed to raise interest rates. Inflation has been a growing concern throughout 2021, but the central bank only started raising interest rates in March 2022. Therefore, the Fed needs to get involved – and take far more drastic measures than if it had start raising interest rates last year.

Last week, the Fed raised interest rates by half a percentage point, the largest single rate hike in 22 years.

Fed Chairman Jerome Powell said this month that the central bank will continue to raise interest rates by half a percentage point at the end of each session until it is certain that inflation will be brought under control – and then the Fed will continue to raise interest rates. by a quarter for For a while.

The Fed is convinced that it can raise interest rates without plunging the economy into recession. But this so-called soft landing has been elusive in the past, and many Wall Street banks believe the Fed will create a recession to outperform inflation.

Sign 2. The stock market is in a state of sell-all

Extreme fear is the dominant emotion on Wall Street this year. CNN Business’s fear and greed index is almost six in 100.
More than $ 7 trillion has disappeared from the stock market this year
After hitting record highs in early January, the stock market lost almost a fifth of its value – sinking stocks close to declining market territory. The Nasdaq (SYNT) is already deep in a bear market. More than $ 7 trillion has evaporated from the stock market this year.

Worried that higher interest rates will erode corporate profits, investors are heading out.

This is bad news for people’s retirement plans. It is also unwelcome news for a number of income-based market investors, including day traders who have estimated that the stock market will grow almost in a straight line for most of the decade. And it’s not good for the consumer feeling either.

Although a minority of Americans are actively investing in the stock market when they see a red sea next to the CNN signal or on their phone screens, this has historically given people a pause. The consumer climate fell to its lowest level in 11 years in May.

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

Sign 3. The bond market

When investors are not so excited about stocks, they will often turn to bonds. NO this time.

Secure US government bonds are selling out. When bond prices fall, yields rise – and 10-year government yields exceeded 3% this month for the first time since 2018.
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This is usually the case when the Fed raises interest rates – higher borrowing costs make bonds less valuable when they mature, so a higher interest rate on bonds (yield) will help offset and make them more attractive to investors.

Bonds have also sold out as the Fed decided to unravel the huge bond portfolio it bought from the pandemic to support the economy.

As bonds sold out and investors feared more of a recession, the gap between short-term and long-term bond yields narrowed. Yields on the two-year Treasury bond rose slightly above those of the 10-year benchmark bond in March for the first time since September 2019. This so-called reversal of the yield curve preceded any recession since 1955, producing only a “false positive” time, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the world

None of this happens in a vacuum. Russia continues its deadly invasion of Ukraine, which has stifled supply chains and sent energy prices soaring. China continues to lock down some of its largest cities as Covid cases remain high. And labor shortages have boosted wages and hampered the normal flow of goods around the world.
Russia continues to threaten European countries by shutting down their energy shipments, which could plunge the EU economies into recession. China’s economy has slowed dramatically as it keeps workers at home as part of its zero-Covid policy.

What is happening abroad could be transmitted to the United States, hurting America’s economy at the worst possible time.

What to do

Okay, so a recession may be coming soon. Here’s what not to do: Panic.
Even if a recession is inevitable, we can not say how serious it will be. But it never hurts to plan for the worst. Here are some ways in which financial advisers say you can isolate your finances from a recession.

Lock a new job now: With extremely low unemployment and many openings, it is a market for job seekers. That could quickly change into a recession.

Cash from the flourishing of housing: If you’ve put up a fence to sell your home, now might be the time to make a list. Housing prices in the United States are rising by almost 20% year-on-year, but mortgage rates are also rising, which will ultimately limit demand.

Put some cash aside: It is always a good idea to have liquid assets – cash, money market funds, etc. – to cover emergencies or unexpected emergencies.

Finally, some wise tips for any market: Do not let your emotions affect you. “Stay invested, stay disciplined,” says certified financial adviser Mari Adam. “History shows that what people – or even experts – think about the market is usually wrong. The best way to achieve your long-term goals is simply to stay invested and stay focused.”

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

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