4 reasons why the economy looks like its about to

4 reasons why the economy looks like it’s about to collapse — 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 at any time since the 1980s. The housing market is burning. Consumers are spending like crazy. Yet we keep hearing the word “recession” as if it were 2007. What’s up?

The truth is that we are unlikely to be in a recession right now (although we may be), but there are many signs that one is around the corner.

Sign 1. The Fed is raising interest rates

Inflation is rife, and the Federal Reserve’s tool for combating rising prices lies in its ability to raise interest rates. This makes borrowing more expensive and slows down the economy – on purpose.

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The problem is that the Fed was super late in raising rates. Inflation was a growing concern throughout 2021, but the central bank only started raising rates in March 2022. So the Fed needs to catch up – and take far more drastic action than if it started raising rates last year.

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

Fed Chair Jerome Powell said this month the central bank would continue to hike rates by half a percentage point at the end of each meeting until satisfied that inflation is under control — and then the Fed would hike rates by a quarter-point a further While.

The Fed believes it can raise interest rates without plunging the economy into recession. But that so-called soft landing has proven elusive in the past, and many Wall Street banks believe the Fed will dictate a recession to beat inflation.

Sign 2. The exchange is in “Sell All” mode.

Extreme fear is the dominant mood on Wall Street this year. CNN Business’ Fear & Greed Index is a meager six out of 100. More than $7 trillion was wiped out from the stock market this yearAfter hitting record highs in early January, the stock market has lost nearly a fifth of its value — stocks plunging near bear markets. The Nasdaq (COMP) is already deep in a bear market. More than $7 trillion has evaporated from the stock market this year.

Concerned that higher interest rates will hurt corporate profits, investors are heading for exits.

This is bad news for people’s retirement savings. It’s also unwelcome news for a range of investors who rely on the market for income, including day traders, who expected the stock market to grow in a virtually straight line for most of the decade. And it’s not good for consumer sentiment either.

Although a minority of Americans actively invest in the stock market, in the past, seeing a sea of ​​red next to the CNN ticker or on their phone screens has stopped people. Consumer sentiment 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 aren’t too keen on stocks, they often turn to bonds. Not this time.

US government safe haven bonds are being sold off. When bond prices fall, yields rise – and 10-year Treasury yields topped 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 interest rates — the higher cost of borrowing makes the bonds less valuable at maturity, so paying more interest on the bonds (the yield) will help balance them out and make them more attractive to investors.

Bonds have also sold off as the Fed decided to unwind its huge portfolio of Treasuries it had been buying since the pandemic to prop up the economy.

As bonds have sold off and investors’ fears of an economic downturn have increased, the gap between short- and long-term bond yields has narrowed. Yields on the 2-year Treasury note briefly rose above 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 and has produced a “false positive” only once, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the globe

None of this happens in a vacuum. Russia is continuing its deadly invasion of Ukraine, which has choked off supply chains and pushed up energy prices. China continues to lock down some of its biggest cities as cases of Covid remain high. And a labor shortage has pushed up wages and hampered the normal flow of goods around the world. Russia continues to threaten European countries by cutting off energy supplies, which could plunge EU economies into recession. China’s economy has slowed dramatically as it keeps workers at home as part of its zero-Covid policy.

What happens abroad could also spill over into the United States, hurting the American economy at the worst possible time.

What should I do

OK, so a recession could be coming soon. Here’s what you shouldn’t do: Panic. While a recession is inevitable, there’s no telling how severe it will be. But it never hurts to plan for the worst. Here are some ways financial advisors say you can protect your finances from a downturn.

Secure a new job now: With extremely low unemployment and many vacancies, it is a market for job seekers. That could change quickly in a recession.

Benefit from the real estate boom: If you’ve been hesitant about selling your home, now might be the time to make a list. House prices in the United States are up nearly 20% year over year, but mortgage rates are also rising, which will ultimately dampen demand.

Set aside some cash: It’s always a good idea to have liquid funds – cash, money market funds, etc. – to cover urgent needs or unexpected emergencies.

Finally, some wise advice for any market: don’t let your emotions get the best of you. “Stay invested, stay disciplined,” says certified financial planner 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 to simply stay invested and stick to your allocation.”

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