(NewsNation) — Stocks slipped Monday after last week’s underwhelming jobs report reignited recession fears, but experts say it’s not time to hit the panic button.
“The market is never as good as it looks and it’s never as bad as it feels,” said Dan Roccato, clinical professor of finance at the University of San Diego.
The Dow Jones Industrial Average fell more than 1,000 points or 2.6% to start the week — its worst day since 2022. By midday Tuesday the index had clawed back 550 points, returning to roughly where it was in early July.
“It doesn’t make us feel good but just keep things in perspective, sell-offs are the price we pay to be invested,” Caleb Silver, editor-in-chief of Investopedia told NewsNation’s Elizabeth Vargas on Monday.
The tumultuous few days of trading come after gloomy economic data indicated the U.S. economy could be headed for a recession. The latest federal jobs report showed employers slowed their hiring in July and at 4.3% the unemployment rate is the highest it’s been since October 2021.
Recent earnings from major American companies like McDonald’s and Amazon have also disappointed — a sign consumers are becoming more cautious with their spending. Last week, the CEO of online home goods company Wayfair went a step further, likening the slowdown in his sector to the “great financial crisis” of 2008.
For now, other economic data isn’t pointing to a 2008-level meltdown, here’s why.
How does the recent Wall Street slide compare to 2008?
Monday’s 2.6% fall marked the Dow’s worst day since 2022 but didn’t come close to other major stock market crashes in recent history.
At the start of the coronavirus pandemic, in March 2020, the Dow plunged nearly 13% in a single day — the most significant decline since Black Monday in 1987.
In 2008, the Dow sank by more than 7.7% on two separate occasions.
The Dow’s biggest % daily losses since 2000:
- March 16, 2020: -12.93%
- March 12, 2020: -9.99%
- October 15, 2008: -7.87%
- March 9, 2020: -7.79%
- December 1, 2008: -7.70%
Bankrate chief financial analyst Greg McBride cautioned investors not to overreact to Monday’s dip.
“Individual investors should be reminded that market volatility is common and a 10% pullback tends to happen, on average, every 12 months or so,” he said in an analysis.
It’s also worth noting that some of the best days for the Dow often come shortly after the worst.
The Dow’s best % daily gains since 2000:
- March 24, 2020: +11.37%
- October 13, 2008: +11.08%
- October 28, 2008: +10.88%
- March 13, 2020: +9.36%
- April 6, 2020: +7.73%
The job market is cool but not that cool
Last week’s jobs report triggered a reliable recession indicator known as the “Sahm Rule,” which says that a recession is almost always underway when the three-month average unemployment rate rises half a percentage point from its low point over the past year.
While the rise in unemployment has been notable — from 3.5% in July 2023 to 4.3% a year later — it’s not unexpected. Since the Fed began raising interest rates in March 2022, policymakers have been trying to pull off a “soft landing,” cooling the labor market enough to ease inflation without tipping the economy into a recession.
So far, the U.S. has avoided a recession but the question now is whether the Fed has kept interest rates too high for too long, as some fear. A significant rise in unemployment in the months ahead would almost certainly slow the main driver of the U.S. economy: consumer spending.
Chicago Federal Reserve President Austan Goolsbee tried to allay some of those fears in an interview with CNBC on Monday, acknowledging that the July jobs report was weaker than expected but said it’s “not looking yet like a recession.”
At 4.3%, today’s unemployment rate is still lower than the average through the early 2000s and much of the 2010s. Roccato thinks a 5% unemployment rate in upcoming reports would signal “we’re clearly headed toward a hard landing.”
At the height of the Great Recession, the unemployment rate peaked at 10%.
The housing market looks different today than it did in 2008
When Americans hear “Great Recession,” the housing bubble is often the first thing that comes to mind. Home prices more than doubled between 1998 and 2006. Over that period mortgage debt rose from 61% of GDP to 97% as lenders took advantage of loosely regulated markets and borrowers took on risky loans expecting to refinance at lower rates.
Once the housing market cooled many were left owing more than their home was worth. Unable to refinance, millions of homeowners couldn’t keep up their monthly payments — the bubble burst.
Today’s housing market looks very different. Home prices are up but mainly due to a lack of supply, not loose loan standards. The inventory shortage means there are still more buyers than sellers in markets across the country, which means a dramatic drop-off in prices is unlikely.
Banks also have tighter lending requirements now compared to 2008.
“I think it’s a dramatically different market than ’08, not bulletproof, but certainly more resistant to what we saw in ’08,” Roccato said.
Another data point to consider: foreclosures are down nearly 90% from their peak in 2010.
How likely is a recession?
Economists at Goldman Sachs recently raised the odds of a recession in the next year to 25% from 15% but still see the risk of a serious downturn as “limited.”
“We do not see major financial imbalances, and the Fed has 525 (basis points) of room to cut to support the economy,” Goldman Sachs said in an analysis reviewed by The Hill.
Forecasts are a dime a dozen but Jan Hatzius, Goldman’s chief economist, is known for his accuracy, correctly predicting the 2008 crash.
Claudia Sahm, the former Fed economist whom the Sahm Rule is named after, has clarified that the rule is a recession “indicator” not a “forecast.” She’s also made the case that the unique post-pandemic labor market could be distorting the current unemployment situation.
In a recent Substack post, Sahm concluded that a recession “is not imminent, but the risks of a recession have risen.”