Despite sagging stocks, analysts allay recession fears, suggest investors hold steady

A stunning Monday that started with a plunge abroad reminiscent of 1987’s crash swept around the world and pummeled Wall Street with more steep losses, as fears, for investors and others, worsened about a slowing U.S. economy.

It was the first chance for traders in Tokyo to react to Friday’s report showing U.S. employers slowed their hiring last month by much more than economists expected. That was the latest piece of data on the U.S. economy to come in weaker than expected, and it’s all raised fear the Federal Reserve has pressed the brakes on the U.S. economy by too much for too long through high interest rates in hopes of stifling inflation.

It got no better at the end of the day as stocks tumbled again by the end of the trading day Monday. The Dow Jones Industrial Average plummeted more than 1,030 points, or 2.6%.

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Pushing back fears of recession

Headlines across multiple media outlets and dialogue over social media raised dramatic fears of a possibly looming recession on Monday. During an interview that aired on KIRO Newsradio’s “Seattle’s Morning News” Monday business analyst Jill Schlesinger of CBS News said she believes that’s behind the sell-off.

“This is about fears of a recession,” Schlesinger said. “We have been seeing over the last few weeks we made new highs in most of the stock market indexes mid-July. But since then, there have been some worries about consumers.”

Notably, she cited the importance of the behavior of consumers when considering the appearance of a recession.

“One of the things that we really are clear about is that because consumers are two-thirds of the U.S. economy, we have to focus on what they’re doing. And what we know is that companies like McDonald’s and Starbucks said, ‘Oh, consumers not spending as much,'” Schlesinger added. “Even big companies like Colgate Palmolive said, ‘Hey, we’re watching consumers.’ They’re not telling us that anything horrible has happened there yet, but they’re keeping a watchful eye. And so what that means is, if consumers are slowing down, there is a fear of a general economic slowdown.”

The latest red flag was Friday’s July jobs report from the Labor Department, which showed that the unemployment rate rose from 4.1% to 4.3% — still a relatively low level but the highest rate in nearly three years. Markets panicked after the report was released, in part because it set off the so-called Sahm Rule.

Named for Claudia Sahm, a former Fed economist, the rule has found that since 1970, a recession has always been underway once the three-month average unemployment rate has risen by half a percentage point from its low of the previous year. The logic behind the rule is that unemployment can be self-sustaining: As more people lose jobs, they cut back their spending, harming other companies, which then stop hiring or even cut workers.

Yet the Sahm Rule could be yet another recession signal that turns out to be a false alarm. Sahm herself doubts that a recession is imminent.

According to The Associated Press (AP), Goldman Sachs economist David Mericle sees a higher chance of a recession within the next 12 months following last week’s jobs report. But he still sees only a 25% probability of that, up from 15%, in part “because the data look fine overall” and he does not “see major financial imbalances.”

Jay Bryson, chief economist at Wells Fargo, told the AP he thinks the risk of recession has risen along with the unemployment rate. But he ultimately thinks the economy will pull through.

“The good news here,” he said, “is that there haven’t been any major shocks hitting the economy,” such as a spike in oil prices or a housing bust. “Absent a shock, it’s a bit more challenging to get into a recession.”

What should investors do? Hold steady

Some analysts, including Mike Alfstad of Seattle-based Alfstad Capital, also have pushed back on those fears, instead insisting that the week’s shoddy start for the market was a regular correction after extended, if not unsustainable, growth.

“I think that what we’re going through is healthy,” he said. “I know that it can be scary or anxious when people who don’t spend all day staring at a Bloomberg screen like I do, where these kinds of moves make them uncomfortable or worrisome, but this is just another phase that’s actually part of the market’s being healthy.”

“I don’t see any reason for me to be on the phone with one of my clients, saying ‘The sky is falling, sky is falling,'”Alfstad added.

Schlesinger agreed with the sentiment that despite the recent disappointing jobs report and stock slump, it is not vital for long-term investors to make any moves at this time.

“The fear of a slowdown quickly morphed into (an), ‘Oh my gosh, we’re headed into a recession. Sell everything,'” Schlesinger said. “You should not do that. You are regular people, you are not an algorithm, and you’re not a day trader. So take a deep breath, hear the news. Understand that if you’re a long-term investor, you do not need to do anything with this information.”

Experts and analysts encourage taking a long view, especially for investors concerned about retirement savings.

“More often than not, panic selling on a red day is generally a great way to lose more money than you save,” Jacob Channel, senior economist for LendingTree, said to the AP.

He reminded investors markets have recovered from worse sell-offs than the current one.

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Social media overreaction

Trending posts and hashtags sought to paint Monday’s returns as signs of impending doom for the economy – like #KamalaCrash that attempted to lay blame on Vice President and presumed Democratic presidential nominee Kamala Harris.

But Alfstad encouraged investors to seek information from trustworthy sources, not social media accounts whose sometimes anonymous operators may or may not have expertise in investing.

“So many have a bias and are interested in generating followers rather than in presenting helpful material,” he said. “So we have to be selective there, and I’m there, too.”

Alfstad’s and Schlesinger’s comments came hours before the markets closed Monday. In addition to the Dow’s steep drop, the S&P 500 dropped 3% for its worst day in nearly two years, while the Nasdaq composite slid 3.4%.

Contributing: The Associated Press

Sam Campbell is a reporter, editor and anchor at KIRO Newsradio. You can read more of Sam’s stories here. Follow Sam on X, or email him here.

Steve Coogan is the lead editor of MyNorthwest. You can read more of his stories here. Follow Steve on X, or email him here.