International markets are roiling Tuesday as the markets reopen after the long weekend. The Dow Jones slipped 600 points this morning on investor fears related to the looming recession in the US. Many economists now say that an economic downturn will almost certainly happen in the next six months due to the Fed’s loose fiscal policy throughout 2021, culminating in the worst inflation since the early 1980s.
The S&P 500 fared no better this morning, dropping 1.9% after the markets opened. The tech-heavy Nasdaq Composite index suffered the slightest losses but still lost 1.5% going into the start of the holiday-shortened week. The market has dropped in four of the last five weeks, leading to concerns that the US economy could be slowing down faster than some experts predicted.
“The US market is all about pricing in a slowdown, and pricing in the fact that the Fed is forced to hike rates into a slowdown,” Allianz chief economic advisor Mohamed El-Erian tells reporters. Major companies are watching their stocks fall as consumer spending slows to a crawl. Shares of Amazon fell more than 2% this morning, and Tesla’s stock price is now another 3.7% lower after an already-choppy year.
US Companies Struggling Amid Inflation
Analysts aren’t surprised to see companies in the US struggling to make money. Consumers have been squeezed far too hard for far too long by unprecedented inflation. Many workers in the US received only small raises, and some simply got no increase in pay to offset the blistering increase in the cost of living. As working-class Americans struggle to afford groceries and gas, it’s unsurprising to see them slowing their discretionary spending.
The question that now lingers is whether these conditions will give way to a formal recession, or if the market will stabilize and return to normal growth. “Recessions are most accurately characterized by a meltdown in employment accompanied by an inability of consumers and businesses to meet their financial obligations. While we are currently experiencing a meaningful slowdown in economic growth (from extremely high levels), neither of the above conditions are present today,” writes Jonathan Golub, an analyst for Credit Suisse.
Investors will have more news to digest at the end of this week. On Friday, the Department of Labor Statistics will release its June jobs report, which will help analysts see how the economy is faring in the midst of Federal Reserve interest rate hikes and historically-high inflation. This report could be instrumental in showing the path the economy will take in the second half of 2022.
Euro Drops Suddenly
The euro, the standard currency for the European Union, has lost significant value in recent weeks. Now the euro is at its lowest level in 20 years, owing to European investors’ extremely negative outlook regarding the standard. It’s now trading for only $1.029, a shockingly low benchmark for the usually-strong currency.
In June, the inflation rate in Europe jumped to an eye-popping 8.6%, leading the European central bank to alert the markets to its emergency plans to implement interest rate hikes for the first time in over a decade. A recent survey shows that economists in Europe have their lowest outlook on the EU’s finances since May 2020, when the continent was in the grip of sweeping lockdowns and a devastating recession.
The situation is worsening in Europe and the US as a result of consumer spending slowing dramatically. Even though the summer months are usually the prime time for travel, working-class people are staying home this year. “Airfares are high, gas prices are high,” Lindsey Roeschke, an analyst for Morning Consult Travel & Hospitality, tells reporters. “And so consumers really feel like they’re in a no-win situation when it comes to travel, so what they’re doing is cutting back.”
Tesla Faces Fundamental Issues
Tesla’s poor performance might come as a surprise to some investors. For years, the American auto manufacturer seemed like a sure-thing bet, given its leading role as a recognizable electric car brand. However, recently, the luxury car maker has encountered issues that have led its stock price to tumble.
“The elephant in the room for Tesla (and the broader market) is with dark economic storm clouds on the horizon and Musk himself thinking recession risk is imminent, what does this mean for Tesla’s demand story going forward?” Dan Ives, the Senior Equity Research Analyst for Wedbush, wrote recently. “In a nutshell, while June delivery numbers were ugly and nothing to write home about, the Street will be focused on the trajectory for the second half… and the overall demand picture staying firm.”
Tesla is facing issues ranging from shortages in microprocessor components to lockdowns in China curtailing economic growth in the company’s most lucrative overseas markets. All of this is further compounded by Musk’s insistence on purchasing the social media platform Twitter, an endeavor that investors fear is distracting him from the role of running Tesla.