The U.S. economy may be "fragile" than investors imagine!

More and more investors believe that the U.S. economy will achieve a "soft landing," where rising interest rates lead to a decrease in inflation without causing a significant blow to economic growth. On the surface, all signs point to this outcome. Inflation has eased. The economy is still expanding. Consumer confidence is rising. Retail sales are healthy. Corporate profits remain strong. And stocks continue to hover at historic highs, with the Federal Reserve expected to cut interest rates at its next meeting on September 18. However, a strategist warns that there are cracks beneath the surface of the strong U.S. economy. Michael Darda, Chief Economist and Macro Strategist at Rose Capital Partners, said, "The thin ice we are skating on is thinner than many people think." Darda pointed out that the rise in U.S. unemployment and overly high expectations for corporate earnings led to stock market plunges in early August and early September. He said: "There have been periods of apparent economic slowdown that eventually lead to a recession, which is not unprecedented. This is somewhat surprising now because many have long believed that a soft landing would be a permanent state of the business cycle. As we entered the summer, stock market valuations reflected this." He warned that "there are some cracks in the business cycle," noting that expectations for the economy, corporations, and the stock market are still at "extremely high" levels. As a result, when Nvidia's earnings did not exceed investor expectations, the S&P 500 index fell by 2% on Tuesday, and in the following days, the market fluctuated and struggled to find a footing after the sell-off. Regarding this pullback, Darda said, "What's happening now makes sense to me. We see that companies that have been soaring based on continuously exceeding revenue or profit expectations have not performed well recently." Darda indicated that the recent pullback shows that investors have been chasing hot stocks and markets in popular areas like artificial intelligence, which could be a "dangerous" game. He said, "This tells me that expectations have risen too much and cannot exceed expectations indefinitely. Eventually, they will catch up. The market is a bit crazy right now. If things start to go wrong, whether it's earnings falling short of expectations or business cycle fluctuations, it will lead to a significant market decline." "Turbulent Waters" But it's not just profits; the job market is also telling a unique story. Last month, the July non-farm payroll report shocked the market as the unemployment rate unexpectedly rose to 4.3%, the highest level in nearly three years. This increase also triggered a recession indicator known as the "Sam Rule." Since the early 1970s, this rule has accurately predicted economic recessions by comparing the three-month average of the national unemployment rate with the lowest value of the previous 12 months. When the former rises by 0.5% compared to the latter, the rule is triggered. Traders immediately panicked, believing that the economic slowdown exceeded expectations. But then the debate began: why did the unemployment rate suddenly rise? Economists and strategists are beginning to outline possible scenarios, including a theory that immigration above trend is boosting labor force participation, so as more workers enter the job market, the unemployment rate faces pressure. With the stock market rebounding and all three major indexes rising at the close of August, this has alleviated investors' concerns. However, Darda stated that the rise in unemployment "is still a bit worrisome," and he does not fully believe recent optimistic comments that high unemployment is not important as long as the economy continues to grow. He explained, "Looking at it in historical context, a 4.3% unemployment rate is still very low. If there is a problem, it is that the unemployment rate has risen from a cyclical low of 3.4% to 4.3%." He said, "These changes and levels tell us that if the economy is still growing, it is growing at a pace below trend or below the potential growth rate. There is a very subtle boundary between this and an actual recession." Investors will receive the latest data on the unemployment rate on Friday, when the August non-farm payroll report will be released. Darda stated that this report could lead to greater market volatility in the coming weeks and months. He speculated: "I think we may be in a high volatility environment, with a fairly high risk of larger pullbacks or corrections in the market. Based on the market backdrop of the past two years, looking at these valuation levels, and based on where I think we are in the business cycle, I believe we will be in a turbulent period for some time."