💰 5 Fact Friday: Time To Hit The Panic Button?

ECONOMY
1. The Real Economy Reigns Once Again 👑

It’s official, maniacs. We’re no longer in the Upside Down.

Between March 2022 and July 2023, the Federal Open Market Committee raised interest rates by 5.25% in the fastest tightening cycle in over 40 years. This aggressive move created a strange dynamic.

At every sign of a slowing economy, markets cheered. It was seen as another step closer to the rate cuts that would ease business conditions and spur growth.

But those days are over.

With traders now pricing in a 100% chance of a 0.25%-0.50% rate cut next month, bad news is back to being, well…bad news.

Last Friday served as our first reality check:

• Unemployment popped up to 4.3% from 4.1%

• The ISM Manufacturing Index dropped to 46.8%, signaling a worsening economic contraction

And the market's reaction? Not pretty. The Dow slid 1.5%, the S&P 500 fell 1.8%, and the Nasdaq took a 2.4% nosedive.

With rate cuts now taken for granted, the focus has finally shifted back to the health of the real economy. Investors aren’t celebrating the slowdown anymore—they’re bracing for impact.

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MARKETS
2. Monday’s Market Mayhem Explained 🚨

As it turns out, last Friday’s stock market correction was just the beginning.

By midday Monday, the Dow had plunged 3.1%, the S&P 500 was down 4.3%, and the Nasdaq took a massive 6.4% dive. Though some panic subsided later, the indices still closed with significant losses: down 2.6%, 3.0%, and 3.4%, respectively.

What drove this chaos? A trifecta of unsettling news:

Buffett’s Big Sell-Off

Warren Buffett sold half his stake in Apple, shaking investor confidence.

When the Oracle of Omaha dumps a large chunk of his largest holding—which also happens to be the world’s largest public company—it’s bound to rattle the market.

Yen Carry Trade Unwind

The Bank of Japan unexpectedly raised rates and hinted at more to come, catching traders off guard.

Institutional investors had been borrowing yen at nearly 0%, converting to U.S. dollars, and investing in bonds. This strategy allowed them to profit from the difference in interest rates, as long as the yen didn’t appreciate against the dollar.

But with Japan suddenly hiking rates and the U.S. lowering them, that’s exactly what happened. To unwind the trade and repay their debt, investors had to pull cash out of the U.S. and Japanese markets.

Recession Jitters

With key indicators flashing red, fears emerged that the Fed might have waited too long to act. Goldman Sachs raised their recession chances from 15% to 25%, while Jamie Dimon of J.P. Morgan puts just a 40% chance on a soft landing.

Despite these fears, the market's panic felt overblown.

I took the opportunity to buy the dip (not financial advice), and I wasn’t alone. J.P. Morgan reported that while retail investors sold $1 billion worth of stocks, institutions were net buyers of $14 billion.

That being said, volatility may be here to stay. After an unusually calm spring and summer, the battle between bulls and bears is heating up. We can likely expect more ups and downs until a new narrative takes hold. Buckle up!

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MARKETS
3. What Wall Street’s Fear Gauge Tells Us 🔮

On Monday, the VIX—Wall Street’s "fear gauge"—spiked to its highest level since March 2020, closing at 38.6.

But what does the VIX really tell us, and why should you care?

Volatility 101

Volatility measures how much a security’s price swings. A highly volatile stock sees wild price changes, while a low-volatility stock holds steady.

The VIX, or Volatility Index, gauges expected volatility across the S&P 500 over the next 30 days.

• Below 12 = Low volatility

• 12 to 20 = Normal volatility

• Above 20 = High volatility

How the VIX Works

The VIX is calculated based on options prices. Investors buy options for downside protection—essentially, market insurance.

When fear rises, demand for this insurance increases, driving up option prices and the VIX. Conversely, when confidence is high, the VIX falls.

Recent Surge

The VIX and the S&P 500 usually move in opposite directions.

The VIX rocketed higher last Friday and Monday as markets sold off. Although it has since settled back down at 23.8, it remains about 40% higher than last week, signaling lingering unease.

The Takeaway

The VIX is a helpful tool for gauging market sentiment. Keep an eye on it to anticipate market highs, lows, and periods of stability.

But remember—volatility is a double-edged sword, offering both risks and opportunities.

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REAL ESTATE
4. Mortgage Rates Hit 15-Month Lows 🏠

If you’ve been waiting for lower mortgage rates, your patience is finally starting to pay off.

The average rate on a 30-year fixed mortgage just dipped below 6.5%—the lowest in over a year. This drop follows a recent slide in Treasury yields, driven by the anticipation of Fed rate cuts.

But the good news might not stop there.

Mortgage rates generally track the 10-year Treasury yield, which has been trending lower as economic jitters mount.

Right now, the spread between the 30-year mortgage rate and the 10-year Treasury yield is sitting at 2.6 percentage points—well above the historical norm of 1.7 percentage points. If this gap closes, we could see mortgage rates fall by nearly a full percentage point.

The housing market is already feeling some relief. Refinancing activity jumped 16% last week, while new mortgage applications nudged up 1%.

If this trend continues, we could be on our way to a more borrower-friendly environment.

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INVESTING
5. The Case For Dividend Stocks 💡

The 10-year Treasury yield has slipped below 4%, but short-term Treasury bills are still dishing out more than 4.5%. Enjoy it while it lasts, because this sweet spot for savers might not stick around.

With rate cuts on the horizon, high-yield savings accounts could lose some of their luster. So, where should income-focused investors turn next?

Dividend stocks could be a safe bet.

The Tax Advantage

Dividends from most U.S. companies—and many foreign ones—are classified as "qualified" dividends, which are taxed at the long-term capital gains rate. This means that depending on your income, you could pay as little as 0% or as much as 23.8% in taxes on your dividend income.

Compare that with up to a 37% tax hit on interest from CDs and bonds, and it’s easy to see why dividends can give you a better after-tax return.

A Quick Example

Let’s say you invest $100,000 in a bank CD that pays 3% interest. If you are in the highest tax bracket, your after-tax yield is just 1.9%.

Now, if you put that same $100,000 into a stock portfolio paying 3% in qualified dividends, your after-tax yield jumps to 2.3%.

The Risk Factor

Dividend stocks come with risks—mainly market volatility. They can swing higher or lower depending on how the market moves.

CDs, on the other hand, offer more security but with a bigger tax bite. It’s a trade-off, but one worth considering.

The Takeaway

With rates set to decline, dividend stocks may be an attractive move for those chasing income. By weighing both pre-tax and after-tax yields, you can make smarter choices about where to stash your cash.

Remember, it’s not just what you make—it’s what you keep.

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