<p>History repeats itself. In 2007, a year before the financial crash, unemployment rose by just half a percent. The same thing happened before the 2001 recession. Now we're seeing the same picture-over the past year and a half, unemployment has crept up by 0.5%.</p>
<p>Looking at statistics from the 1960s onwards, it becomes obvious: such unemployment growth has always preceded economic downturns or occurred right during them. Meanwhile, the White House has already begun new layoffs amid the shutdown, and the Fed openly says risks have shifted from inflation to the labor market.</p>
<h2 id="header-0">The Paradox of an Overvalued Market</h2>
<p>But here's what's interesting: the stock market is at historic highs. Yes, last Friday it corrected by 2% (the worst day since April), but it continues to show confidence despite employment problems. This situation resembles October 2007, when the S&amp;P 500 was also hitting new highs amid rising unemployment. That ended with a 60% drop.</p>
<h2 id="header-1">Three Warning Signals</h2>
<p>Interest rates. The Fed is holding rates at their highest level since 2008. Expensive money restrains inflation but strangles economic growth. Cheap money fuels business and assets but spins up the inflationary spiral.</p>
<p>Leading economic indicator. Has been declining for three years straight. This isn't a short-term fluctuation but a persistent trend.</p>
<p>Jobs. In June 2025, for the first time since 2020, negative job growth was recorded. Recent data shows new positions are barely being created. Plus, last year's statistics were revised down by 911,000 jobs—they simply never existed.</p>
<h2 id="header-2">The Catalyst-That's the Question</h2>
<p>Markets need a trigger. Look at the century-long S&amp;P 500 chart: every major peak before a recession had its catalyst. In 2020-the pandemic (as in 1920). In other cases-the burst bubbles of 2000 and 2008, or the oil shocks of the seventies and nineties.</p>
<p>Today, many economists see a potential catalyst in Trump's tariffs. It was on Friday, when the S&amp;P 500 began correcting, that Trump announced distrust of China and new increased tariffs. Markets reacted instantly.</p>
<h2 id="header-3">Tariffs Versus Oil Shocks</h2>
<p>Before crises, oil prices on average soared by 150%. Oil is the lifeblood of the economy: its price increase raises transportation costs, production costs, the entire supply chain. It's a universal tax on business, reducing margins and accelerating inflation.</p>
<p>Trump's average tariff is currently around 18%. At first glance, incomparable to 150% oil growth. But what matters more is the impact on GDP. A doubling of oil prices reduces GDP by about 5%. With a 150% jump-that's minus 7.5% to GDP. Tariffs are projected to hit GDP by 2.6%. Seemingly three times less.</p>
<p>However, there's a nuance: uncertainty. Oil shocks can be smoothed out-OPEC will increase production, supply and demand will balance. But what about tariffs? No one knows what Trump will write on Twitter tomorrow morning. This unpredictability paralyzes business. Companies have frozen hiring and postponed deals until the situation clarifies.</p>
<p>In April, the stock market fell almost 20% after tariff announcements. Then Trump began rolling back decisions (a meme even appeared: "Trump backs out"), investors got more clarity, and the market went up. But for American business, predictability matters most. When investors are confident in a company's stable profits, they readily buy shares. Tariff uncertainty destroys that confidence.</p>
<h2 id="header-4">The Problem of Corporate America</h2>
<p>Looking at operating profits of S&amp;P 500 companies. Everything seems fine, profits are growing. But that's without accounting for inflation. If we add inflation to the picture, real profit is at the same level as in 2021. Four years of treading water. There was a small peak in October 2024, but now real profit is falling. We saw the same trends before COVID, before 2008, before 2000.</p>
<p>Revenue is even worse. Nominally there's a small decline and growth again. But adjusted for inflation? Real revenue peaked in 2022 and has been declining since. The overall drop is more than 7%. There was a local bottom in February 2024, a small 2% bounce, but that's stagnation.</p>
<p>Interesting fact: in 2008, revenue didn't fall before the crisis. But now it's falling. Corporate America is going through hard times. And we're not talking about individual weak companies-we're talking about all American business as a whole.</p>
<h2 id="header-5">How Companies Stayed Afloat</h2>
<p>Over the past three years, not a single new full-time job has been created. All new positions are part-time. Companies protected margins by moving people to part-time work. Was working full-time-now part-time, and we won't pay insurance either.</p>
<p>That's why American optimism is falling. The corporate world can't thrive while the consumer suffers. These things are tightly connected. If one suffers, so does the other.</p>
<p>Profits grew through optimization. But you can't optimize endlessly. The next steps will be radical: direct layoffs, capital expenditure cuts. This will hit the market hard. And it's already beginning-profits have started falling even after all optimizations.</p>
<h2 id="header-6">The Wealth Effect Works Both Ways</h2>
<p>More than half of US consumer spending comes from high-income Americans-just 10% of the population. This is the highest level since the nineties.</p>
<p>In 1990, stocks made up just 5% of American household portfolios. Now-over 40%. As the stock market grows, people feel richer and spend more. This is called the wealth effect.</p>
<p>But there's a flip side. When the stock market falls, people feel poor and stop spending. This slows the economy even more, which pressures stocks-a vicious cycle.</p>
<p>During recessions, corporate profits fell by an average of 30%. The reverse wealth effect could turn this into a 40% drop. At current earnings per share levels, the S&amp;P 500 could fall to 4,700 points-down 40% from current levels. And markets usually don't go to fair value but to undervaluation. That 40% easily becomes 60%.</p>
<p>There's also the risk of passive investing. Securities from different sectors move identically because they're in the same passive basket and rebalance simultaneously. This increases volatility and reduces diversification.</p>
<h2 id="header-7">Three Strategies for a Crash</h2>
<p>Dollar-Cost Averaging (DCA). Periodically invest in the S&amp;P 500 index regardless of market movements. For most, this is a safe method. Though at current levels, it's better to wait for at least a 30% drawdown. If you have a large sum-split the entry into 10-12 months in equal parts.</p>
<p>Valuation-Based Investing. Warren Buffett's style from Benjamin Graham's book "The Intelligent Investor" (which, by the way, is 100 years old). Determine asset allocation based on how expensive or cheap stocks are. The market can stay expensive for a long time. But if valuations drop, you'll have a reserve of bonds or cash to buy discounted stocks.</p>
<p>Market Timing. For professionals. Stay in defensive assets (bonds, cash) and wait for the market to drop to acceptable levels. Requires understanding when the market truly becomes cheap and worthy of entry.</p>
<p>The market is flashing red. The question isn't whether there will be a correction-the question is when it will start and how deep it will be. You need to prepare now, not when everything has already crashed.</p>

The Labor Market as a Crisis Harbinger: What's Happening with the American Economy in 2025

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Vasili Shchastny

Other articles published on Oct 17, 2025

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