MINNEAPOLIS — Monday was a rough day on Wall Street.
The Dow Jones Industrial Average plunged more than 1,000 points.
Stocks across the globe tumbled as fears of an economic slowdown sent shockwaves across markets.
The stock market slide follows a weaker-than-expected jobs report last Friday and the Fed holding off on cutting interest rates.
Many analysts are focusing on a rule in the world of finance called the ‘Sahm Rule’ that suggests a recession may be coming.
The ‘Sahm Rule’ is named after its creator Claudia Sahm, an economist who posed the theory that jobless numbers over time may be able to predict a recession in the economy.
The rule basically says that when the unemployment rate’s 3-month average jumps more than 0.5% in a year’s time the economy is headed for a recession.
Market analysts argue the rule has accurately forecast every U.S. recession since the 1970’s.
Analysts say the jobs numbers that came out on Friday triggered this rule and that's why some believe a recession may be coming.
Michael Binger with Gradient Investments advises investors not to panic. To put Monday’s drop in perspective, he points out that gains over the last 18 months were actually up close to 40 percent.
And while some fear the Fed may have waited too long to cut rates and instead of soft landing, the economy could slide into recession, Binger says many aspects of the economy remain strong.
“I think the market fundamentals are still good so use this as an opportunity, not a reason to panic,” he advises.
Many investors are using the 'Sahm Rule' as a reason to sell their stocks, especially large tech stocks, which saw a significant drop in value on Monday amongst the frenzy of buying and selling.
On top of this, many analysts believe the Federal Reserve is too late with its interest rate cuts.
These analysts argue that even if the Fed decided to cut interest rates during their next meeting in September the cuts would not come in time to prevent a recession.
Some market analysts are now calling on the Fed to hold an emergency meeting so they can enact an emergency interest rate cut to try and get the stock market and economy back on track.
University of Saint Thomas Economist Tyler Schipper argues an emergency rate cut is unlikely and probably a bad idea.
Professor Schipper sent KARE-11 this explanation for why he believes an emergency rate cut could do more harm than good:
The stock market response today seems to be out of proportion to any real changes in economic conditions. Yes, the labor market is slowing, but it has been slowing for several months. And slowing doesn’t necessarily mean a recession. In 2024, the economy has still created more jobs per month than in 2019, and there are still as many job openings per worker as pre-pandemic.
Given the available data, I think that Chair Powell and the Federal Reserve are loath to do any kind of emergency rate cut. They should project calm and carry on – as we all should with our portfolios. To do anything else may signal to markets that the Federal Reserve sees a real change in their analysis of the economy and may actually cause a larger sell-off.
I don’t think we should minimize that stock sell-offs feel scary, but we should remind ourselves that the stock market is not the economy. A weak economy can lead to a lower stock market, but a stock market sell-off can also be divorced from current economic conditions.
Professor Schipper is right, selloffs ‘feel scary’ and that’s why many investors are rushing to their financial advisors for help.
Grant Meyer from TruMix Advisors says he is receiving a lot of calls and emails from his clients this week.
He agrees that the numbers are signaling the possibility of a recession, but whether a recession happens or not he is encouraging his advisors to stick with their plan and focus on long-term growth.
“The headlines may be scary, people may open up their statements and be concerned and that's okay to be concerned, to watch occasionally and make sure your portfolio is where you need it to be, but trading a portfolio around market headlines is never a good strategy. If I had one message to everybody watching it would be to remain calm,” Meyer says.