If you glanced at your news feeds on Monday you may have seen a variety of headlines about a tumbling stock market, weak U.S. jobs data, and fears of a possible recession.
As reported by USA TODAY, the S&P 500 Index was down 8.6% and the NASDAQ 100 fell 5.4% as of Monday morning. International markets also saw drops prior to the Monday morning plunge.
There is a lot of information floating around and it can be a bit confusing and even concerning, especially amid conversations of a recession.
Here are the basics about what happened Monday and why you likely do not need to panic, according to experts.
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Why did the stock market drop on Monday morning?
Per USA TODAY, some of the driving forces behind the drop include sharp declines in tech stocks including Nvidia, Apple and Amazon and a disappointing jobs report, which was released by the Labor Department on Friday.
In the July jobs report, the Labor Department said that the unemployment rate rose from 4.1% to 4.3%, the highest since October of 2021. Hiring in the United States also slowed as employers added only 114,000 jobs. Per the U.S. Bureau of Labor, the average monthly job gain in the United States has been 215,000 jobs per month over the last 12 months.
According to Roberto Chang, professor of economics at Rutgers University, the July report likely confirmed for many people that the Federal Reserve, in its effort to reduce inflation, has kept interest rates high for too long, triggering a fall in the market over the weekend.
“The number that caught everybody’s attention was the number of employment growth that showed a significant slowdown compared to previous months,” said Chang, who explained that, in order to combat inflation, the Federal Reserve started increasing interest rates.
“Now inflation is starting to come down. Inflation came down below 3% per year, very close to the target of 2% that the Federal Reserve says is the long-term objective. So, inflation is almost there, but it is not quite there … those high interest rates affect everybody,” said Chang. “Then now, on Friday, some people are saying that the Federal Reserve has been too cautious, too slow in reducing interest rates. I think that kind of feeling essentially attacked the markets during the weekend.”
He continued, “Around the rest of the world the stocks fell and that was the reason why… we had an unusually big fall in the United States stock market.”
The main index in the Japanese market, Nikkei 225, dropped 12.4% Monday, its biggest fall since 1987, according to Business Insider.
According to Eugene White, professor of economics at Rutgers University, that drop likely spooked investors, but there are not a lot of worrying conditions domestically. He also said that, while the unemployment rate did rise in this last report, anything below 5% is an economy which is “really at full employment.”
“The drop in the Japanese market is enough to scare many investors because it’s so big, but what is driving that?” said White. “I don’t see anything really domestically which would warrant such a drop. Maybe it’s people anticipating further bad news coming out of Japan. Given that inflation is down, unemployment is under 5%, there is not a lot of worrying conditions.”
As the market fluctuates around the world and the July jobs report makes headlines, how concerned should we be about a recession?
According to both Chang and White, we should not be too panicked right now.
What is a recession?
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
“The official definition of a recession is a little flexible,” said Chang. “It’s decided by the National Bureau of Economic Research, but a good rule of thumb is two quarters of consecutive negative growth.”
What causes a recession?
There are various ways that a recession can get started, according to Forbes Advisor.
Some of the main drivers of a recession, per Forbes, include:
- A sudden economic shock: A surprise problem that creates serious financial damage. A recent example of this includes the coronavirus outbreak.
- Excessive debt: When businesses or individuals take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills, says Forbes.
- Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind.
- Too much inflation: Inflation is defined by Forbes as the steady, upward trend in prices over time.
- Too much deflation: Deflation is described as when prices decline over time, causing wages to contract, which further depresses prices.
- Technological change: Although new inventions can increase productivity and be beneficial to the economy in the long term, there can be short-term periods of adjustment to new breakthroughs in technology.
Are we going into a recession? Should I worry?
According to both Chang and White, people should not be too concerned about the situation as the United States’ economy is generally strong in terms of various factors such as relatively low unemployment, reasonably good consumer spending, dropping inflation and more.
“If you look at the United States economy from a number of other perspectives it remains immensely strong,” said Chang. “I trust that the federal reserve is going to do the right thing. For me, there is a lot of movement for very little rational reason.”
White referred to a quote from Nobel Prize winning economist, Paul Samuelson who said, “The stock market has accurately predicted nine of the past recessions,” pointing out the inaccuracies of making predictions solely based on the market as it has lots of gyrations without necessarily causing a recession.
“I think the important thing is that the market oftentimes moves in ways that the real economy doesn’t,” said White, referring back to Samuelson’s quote. “Sometimes there is a drop, for instance, the drop around GameStop. You can point to other times where the market has gone down and nothing apocalyptic has happened.”
He continued, “The one thing is that it’s very difficult to beat the market and for people trying to say ‘Okay, I should get out of the market now,’ the market could drop further, and you want to get back in. Buy and hold has been the best strategy for anyone saving for the long term.”
Both Chang and White say that there is no reason to panic.
“I think that people sometimes see the news and the news is very sensational and they start changing their investments,” said Chang. “I think in this kind of situation my best advice is to sit tight and take your time. There is nothing worse than making rash decisions on the basis of a weekend’s worth of data.”
What time does the stock market open and close?
The United States stock market opens at 9:30 a.m. ET and closes at 4 p.m. ET., Monday through Friday except during holidays.
The remaining market observed holidays in 2024 include Labor Day on Monday, Sept. 2, Thanksgiving Day on Thursday, Nov. 28 and Christmas on Wednesday, Dec. 25.
Additionally, each market will close early at 1 p.m. the day after Thanksgiving on Friday, Nov. 29 and on Christmas Eve on Tuesday, Dec. 4.
