Although the S&P 500 and Nasdaq are on the verge of new highs, and the latest economic data looks promising, many companies are still facing serious difficulties.
It's more than slower profit growth or declines; some companies are really struggling to stay afloat due to high interest rates and inflation, leading to higher costs and tighter margins.
Not surprisingly, Chapter 11 bankruptcy filings under the U.S. Bankruptcy Code rose 34% to 2,462 in the first half of 2024, more than twice as many as two years ago.
Small businesses are the hardest hit, with a 61% year-over-year increase. Startups fare no better, with a failure rate of 60%. Compared to 2019, bankruptcies have increased sevenfold.
The problem with the latter is that entrepreneurs have exhausted the investments they raised during the 2021-2022 tech boom, putting around four million jobs at risk.
If things keep getting worse, this wave of bankruptcies could threaten the stability of the entire economy. For now, the markets don't seem to think it’ll lead to anything too severe.
It should be noted, however, that companies are finding it more difficult to raise new capital, as investors now expect faster returns, not just growth. Promising this in an uncertain environment is not easy.
Therefore, if the US economy takes a big hit and the Fed cuts rates, startups and businesses could face serious problems. Consequently, it is crucial to choose investments carefully.
So, just because the Dow Jones index lags the S&P 500 and Nasdaq doesn't mean it's a guaranteed buy. It might be profitable in the short term, but it could be even more problematic in the long term.
What will happen next?
Even if bankruptcy statistics raise concerns, investors tend to focus on the outlook, which currently largely depends on the Fed's monetary policy decision.
If Powell hints at the Jackson Hole Economic Symposium on August 23 that a rate cut could come in September, markets could get a boost. The big question is how strong the rebound will be.
Typically, market trend reversals occur immediately after a regulator reverses its hawkish course and cuts interest rates. Therefore, one should keep a close eye on developments.
US Treasuries and XAUSUD are the preferred hedging options to protect your portfolio from possible downturns. Experience shows that cryptocurrencies are not very protective assets.