The Dow Jones slumps over 1,000 points as fears about the U.S. economy intensify
Stocks fell sharply Monday as worries about the U.S. economy sparked a world-wide sell-off.
Market jitters that began with last week's weaker-than-expected jobs report spread to Europe and Asia, as investors worry that the world's largest economy — long a pillar of global growth — is beginning to show some cracks.
The Dow Jones Industrial Average tumbled more than 1000 points on Monday or 2.6%, while the broader S&P 500 index fell 3%. Japan's Nikkei average suffered its worst day since 1987, falling more than 12%.
A measure of market fear more than doubled, after a rise in the U.S. unemployment rate triggered worries that the country could be headed for recession.
Technology shares routed
Technology stocks, which had been at the forefront of a recent boom in markets are being pummeled. Long-term investor Warren Buffett revealed that Berkshire Hathaway had cut its stake in Apple by half during the second quarter, sending shares in the company down over 5%.
Some analysts wonder if the sell-off is an overreaction. While last week's jobs report was weaker than expected, U.S. employers continue to add jobs. The unemployment rate rose to 4.3% not because of widespread layoffs but because more than 400,000 new workers joined the labor force last month.
A survey of services sector managers released Monday offered some reassurance that the U.S. economy is not on the verge of contraction. The survey, from the Institute for Supply Management, showed that unlike the manufacturing sector, which is stuck in a slump, the larger services side of the economy continued to grow in July with new orders, production and employment all expanding.
"The latest ISM services report will ease fears of a sharp economic slowdown," Oren Klachkin, financial market economist at Nationwide, wrote in a research note. "Expanding services activity remains the bulwark of what is still a growing economy."
Still, investors are nervous that the economy may finally buckle under the weight of high interest rates.
The Federal Reserve voted last week to keep rates at their highest level in more than two decades, where they've been for the past year. The central bank signaled a rate cut is possible at its next meeting in September, but pessimists worry that may be too late to stop the slide.
Transcript
AILSA CHANG, HOST:
Stocks fell sharply today as investors worried that the U.S. economy could be headed for recession. The Dow Jones Industrial Average tumbled more than 1,000 points or 2.6%, and the broader S&P 500 index dropped by 3%. Jitters that began last Friday with a weaker-than-expected jobs report rapidly spread throughout the world. Japan's stock market suffered its worst days since 1987. NPR's Scott Horsley joins us now to talk about all of this. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Ailsa.
CHANG: OK, so I thought just a few weeks ago the stock market was hitting record highs. Why have things turned around so suddenly?
HORSLEY: Well, you're right. The market had been on a tear. Before this crash, the S&P was up more than 30% for the year. But when the wind shifts, it can shift in a hurry. And one catalyst was that jobs report we got last week, which showed employers adding fewer jobs than expected as the unemployment rate jumped to 4.3%. Now there's a rule of thumb called the Sahm Rule that says when the average unemployment rate goes up by half a point, it typically keeps on climbing. So that set off some alarm bells. But the author of the Sahm Rule, former Fed economist Claudia Sahm, says this might be an overreaction.
CLAUDIA SAHM: Typically, when the Sahm Rule triggers, it tells us we're in a recession. That is not the right way to think about this moment. What we learned about the labor market in July, that was not good news, but it wasn't the-bottom-has-fallen-out news either.
HORSLEY: The reason the unemployment rate jumped last month was not because a bunch of people lost jobs, but rather because lots of new people joined the workforce. So that doesn't cause the same kind of drag on the economy. Still something to keep an eye on to be sure, but it might not be the five-alarm fire you'd guess from watching the stock market.
CHANG: OK, that's good. So maybe the economy is not on the edge of a cliff, but is it weaker than we thought?
HORSLEY: It's definitely not growing as fast as it was, but it is still growing. Just this morning, we got a report from the Institute for Supply Management on the services side of the economy. That's everything from restaurants to construction to entertainment. And it shows new orders, production and employment in services were all up in July. So that's reassuring for the real economy. The gains might be modest, though, and that could be a disappointment to stock investors who've been betting on sky-high returns.
You know, so much of the big run-up in the market lately has come from excitement over tech stocks and especially artificial intelligence. And now investors are starting to question whether those big bets are ever going to pay off. Some are pulling money out of the market. Long-term investor Warren Buffett disclosed recently that his Berkshire Hathaway company has cut its stake in Apple by about half. Even after the sell-off, Apple shares are still up nearly 13% for the year.
CHANG: Wow. Well, how do you think the Federal Reserve will likely respond to this turbulence in the stock market?
HORSLEY: You know, the Fed's job is stable prices and maximum employment, not propping up the stock market. Obviously, the Fed's keeping an eye on this, making sure financial markets continue to function smoothly. There are critics who think the Fed missed an opportunity last week when it decided not to cut interest rates. But Claudia Sahm says the Fed still has ample room to cut when it meets again next month.
SAHM: The Federal Reserve has a substantial lever to pull. It's not like there was just this moment in time where the Fed acts or it doesn't act and all is lost. There may be some catch up, but it's about getting the job done.
HORSLEY: Some have even suggested the Fed might cut before the September meeting, although analysts I've talked to think that's unlikely.
CHANG: That is NPR's Scott Horsley. Thank you, Scott.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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