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--:-- John Bickley: A rollercoaster week in the stock market that saw the steepest sell-off in decades, followed by an aggressive rebound, has renewed concerns about the health of the U.S. economy. In this episode, we talk with an expert about the economic factors playing into the turbulent week and how much the presidential race will influence the economy going forward.
--:-- Georgia Howe: I'm Daily Wire editor-in-chief John Bickley with Georgia Howe.
--:-- John Bickley: It's Saturday, August 10th, and this is an extra edition of Morning Wire. Joining us now is Peter Earle, senior economist at the American Institute for Economic Research.
--:-- Peter Earle: Thank you so much for having me on.
--:-- John Bickley: Look, this week we saw a big sell-off in the stock market followed by a rebound. Can you put all of the events leading up to the sell-off into perspective for us?
--:-- Peter Earle: Certainly. So what we've really seen in the last few days is that we've gotten some economic data, which has in totality shown or suggested that the U.S. economy is in worse shape than we thought. In particular, we've seen a lot of bad news regarding U.S. labor markets and employment. The weekly and initial continuing claims have been rising, and they're above a level that usually suggests softness in the labor market.
--:-- Georgia Howe: What are some of the factors playing into all of those negative indicators that you just listed?
--:-- Peter Earle: We're seeing that there's a rise in unemployment, but that's partially a result of a slowing economy. It's also partially a result of growing concerns about uncertainty coming from overseas, whether because of what's happening in Ukraine and Russia, things happening in the Middle East, tensions between the U.S. and China. I mean, also, interest rates are high. Inflation is still not down where the Fed wants. We have an election coming in the fall. So there's a whole bunch of factors, economic, social, political, which are weighing on markets right now.
--:-- Georgia Howe: And it's kind of given rise to a sort of a hair trigger where people would rather sell now and ask questions later. So they're getting out of an already extended stock market.
--:-- Peter Earle: Do you see any signs of a long-term problem or just more short-term trends?
--:-- John Bickley: Whether or not this is a long or short-term situation is going to depend upon upcoming economic numbers and what investors do.
--:-- Peter Earle: In the last six to eight months, what we've seen in equity markets, in particular in the S&P 500, but in all the U.S. stock markets, is that the advance in stock prices, the advance in indices, was really being led by only a handful of stocks that came to be known as the Magnificent Seven. And because of that, we have a whole bunch of other stocks. Most of the majority were either flat or even slightly down on the year.
--:-- Georgia Howe: The hope is that the economic numbers, if the economic data proves to stabilize and maybe doesn't decline much more, that what we'll have is with the stocks coming down, there'll be sort of a turnover in leadership. Other stocks will sort of come to the fore and we'll have a more broad-based increase in stock prices.
--:-- Peter Earle: But if that happens, then, yeah, I mean, there's no reason why the stock market can't continue on to forward and then maybe even newer heights.
--:-- Georgia Howe: Another factor right now is earnings. Corporate earnings have not been that great. And in particular, in some of the big stocks, you know, we saw Apple, Microsoft, a lot of those companies revised their future estimates lower.
--:-- Peter Earle: And for that reason, yeah, it's time for some new stocks, new sectors to sort of come to the fore and lead the charge on to higher levels. I think the tech sector is kind of exhausted at this point.
--:-- Georgia Howe: What sectors of the economy do you think maybe are primed for that kind of upward action?
--:-- Peter Earle: If we continue to see weak employment numbers, softening labor markets, if consumers continue to feel pressure on their budgets because of interest rates remaining high and because of ongoing inflation, the sectors we most likely see are the consumer sector, foods, things that people sort of have to buy. We would see things like certain industrials rise, certain commodity material stocks, things that represent sectors or goods and services that people have to purchase, whether or not the economy is slowing down.
--:-- Georgia Howe: Now, you mentioned the Magnificent Seven earlier. Can you talk through a little bit about what we're seeing with them? That's Alphabet or Google, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. What was troubling about their earnings reports?
--:-- Peter Earle: The one thing we can say about, you know, half of members of the Magnificent Seven is that the goods and services that they offer on the expensive side, you know, Tesla, Apple, that sort of thing. Whereas Amazon is a consumer company that has very global reach. So we're seeing different things from all of them. But generally speaking, their valuations have run up so much that in order to justify those valuations, their revenues would have to be very high.
--:-- Georgia Howe: And I think what their companies are suggesting is that the revenues won't be high enough to justify those valuations, but they are also called into question by the withdrawal of consumers for whom the savings rate has dropped and their ability to consume is pretty constrained right now, given many of them are maxed out on credit.
--:-- Peter Earle: We've seen a rise in 30 and 90-day arrears payments and late payments on credit cards. So consumers, they're kind of tapped out of their pandemic savings and corporate revenues are going to have to reflect that sooner or later.
--:-- Georgia Howe: Yeah, we've reported in the past on credit card debt hitting record levels. Where is the debt level at right now?
--:-- Peter Earle: Well, right now, the highest amount ever of outstanding credit card debt is still the case. It's over a trillion dollars. What's been happening a lot is that people have been sacrificing spending in other areas to make their payments.
--:-- Georgia Howe: I think that two of the things we're going to see the Fed take into account, whether or not they say it or not, is not only the state of the economy, but also taking some pressure off of credit card borrowers by lowering rates.
--:-- Peter Earle: Now, just because the Fed lowers 25 or 50 basis points doesn't mean that the interest rates on credit card debt will necessarily lower that much, but they will decrease somewhat, and that could take some pressure off of borrowers.
--:-- Georgia Howe: Now, will that pressure be enough to get them to start spending again? Will consumers start consuming with lower credit card rates?
--:-- Peter Earle: Probably not to an appreciable extent, but it all depends on what's happening elsewhere in the economy. If we continue to see unemployment rise, if we continue to see decreasing open positions such as we saw on the JOLTS report, if we continue to see credit card rates subject to delinquencies and higher arrears rates, I don't think that we'll see rates on credit card debt come down much, and that's going to affect the whole consumption picture and, of course, the revenues of these companies.
--:-- Georgia Howe: You referenced the upcoming election as adding some volatility to the market. We heard the term Kamala crash at the beginning of this week after she became a favorite in the betting markets to win. At this point, do the two candidates really affect the stock market that much?
--:-- Peter Earle: At this point, I don't think so at all. I think the whole idea of Kamala Harris's emergence as the leading candidate has very little to do with what's happening in the stock market right now.
--:-- Georgia Howe: As we get closer to the election, and in particular, polling is very close. And in particular, if either of the candidates have made very sort of stark announcements about their policies, then we might start to see effects in the stock market. But right now, what we're seeing in the stock market is much more directly attributable to bad economic data and to more general worries about uncertainty going forward.
--:-- Peter Earle: We will see more directly related campaign effects as we enter mid-October or so.
--:-- Georgia Howe: Final question. What aspects of the current economic situation do you believe are going underreported generally?
--:-- Peter Earle: I believe that the fact that the savings rate has fallen so much and that there's almost nowhere left for consumers to spend other than out of current income. And, you know, of course, they're facing at the same time, they're facing higher mortgage rates, higher rents, higher food prices.
--:-- Georgia Howe: I think the fact that the consumer is pretty much out of gas is something that has not been not much has been said about it. It may become more of a factor as we enter September, October. But that's something that I'm going to have a close eye on because, you know, we've seen everything from buy now, pay later plans to consumers shifting away from durable goods purchases. It seems very much like consumers are, they don't have much left that's discretionary, and they're kind of playing a shell game in terms of determining how much they're going to spend on what and what areas.
--:-- Peter Earle: So that's something that could very quickly hit the economy in addition to rising unemployment and sort of softening business conditions. Something we'll certainly keep an eye on.
--:-- Georgia Howe: Thank you so much for talking with us.
--:-- Peter Earle: It's my pleasure. Thank you so much. I hope you guys have a great day.
--:-- John Bickley: That was Peter Earle, senior economist at the American Institute for Economic Research. And this has been an extra edition of Morning Wire.
