Stocks Regained Momentum, So Why All The Talk About A Recession?
Should you buy the dip or wait for the big fall?
Stocks Regained Momentum
The first week of August was horrifying for investors. The markets declined across all three market indexes.
Down Jones lost more than 2,000 points
NASDAQ fell more than 1,300 points
The S&P 500 slid more than 300 points
What caused the sell-off?
Major tech companies dropped the ball during earnings week and missed Wall Street forecasts.
Hiring slowed, and consumers are spending a lot less.
These caused growing fear of an economic downturn—(cough) a recession.
But that didn’t stop the market from telling a comeback story last Thursday when jobless claims came in lower than expected.
Although companies aren’t hiring as much, the slowdown in jobless claims says they aren’t firing, which helped boost investor sentiment about the U.S. economy.
But if companies aren’t laying off employees and first-time unemployment claims are down, does that mean the economy is stabilizing, and we should all buy the dip?
After all, when the economy is stable, stock prices go up.
What do you think? Are you buying, or will markets fall further in the coming weeks?
Sahm Rule Strikes Again
If you haven’t heard of the Sahm Rule until this year, don’t be ashamed. You’re not alone.
Claudia Sahm, who worked at the Federal Reserve and the White House Counsel of Economic Advisors, created an indicator that predicts early signs of a recession.
And it has been accurate so far. Very accurate! Since 1970, it hasn’t been wrong.
Here’s how it works:
It measures the current 3-month average unemployment rate against the lowest average in the last 12 months. When that average rate is above 0.5%, we’re in the early stages of a recession—according to the rule.
On August 2nd, that rate was above 0.5%, and the Sahm rule was triggered.
But just because the rule has historically been accurate, does it mean it’s accurate now? Even Claudia says her rule is “empirical regularity,” meaning it can be broken depending on economic activity.
While no one knows if we’re actually in the early part of a recession, investors are watching Fed Chair Jerome Powell closely to see what he will do with interest rates in September.
Claudia says cutting rates could support the economy. That would stimulate investor confidence.
On the other hand, keeping rates the same might increase the market's fears of a looming recession and cause markets to tumble even further.
Don’t Panic, Just Plan
With all this talk about recessions and stock prices falling, retail investors usually panic and sell everything. It’s one of the top 10 reasons so many fail.
I get it — watching your investments lose value without doing something is hard. But trust me, panic selling isn’t the answer. I learned that the hard way years ago.
Remember, since the S&P 500 was created in 1957, it has only seen 18 years of negative returns. It returned to growth within a year 14 of those times!
You have to manage your emotions. It’s a huge part of investing. If you can do that, you’re more likely to make a significant profit over time.
Just breathe, look at your portfolio, and plan your next moves. When you’re ready to execute, execute!
Tools and Resources
In 2019, I read a book that taught me to manage my emotions in the market. It might help you, too. Pick it up here: