Global stock markets continued their Friday stumble with a Monday tumble, as all three major U.S. indices fell by two percent or more. The Dow Jones index, which fell 600 points on Friday, lost an additional 900 points on Monday. The Nasdaq lost 900 points over the two days, while S&P lost 250 points; meanwhile global stock markets also crashed, led by Japan’s Nikkei 225, which lost 12%.
Some analysts attributed the stock market crash to July’s lackluster jobs report, also released on Friday. According to the Bureau of Labor Statistics (BLS), the U.S. economy added only 114,000 “nonfarm payroll” jobs in July, the second fewest for any month in the past two years, behind April 2024.
Meanwhile, the unemployment rate rose to 4.3% (from 4.1% in June), as the number of unemployed people rose to 7.2 million, an increase of 352,000, or approximately three times the number of jobs added. “These measures are higher than a year earlier,” the BLS reported, “when the jobless rate was 3.5 percent, and the number of unemployed people was 5.9 million.” The unemployment rate has risen by half a percentage point since March 2024, when it sat at 3.8%.
These numbers have triggered concerns about the “Sahm Rule,” named after former Fed economist Claudia Sahm, which uses dramatic shifts in the unemployment rate as a leading indicator of a recession. According to the Sahm Rule, if the unemployment rate’s current three-month average is more than 0.5 percentage points greater than the 12-month low, the economy is headed into a recession. (The three-month average is currently 4.13% unemployment, while the 12-month low is 3.6%.) While it does not provide a causal explanation of recession, the Sahm rule has been a historically accurate indicator of them.
But Bowyer Research President Jerry Bowyer is not convinced by this explanation. “For years, we haven’t seen the market [go] down on bad economic news. We’ve seen the market [go] up on bad economic news because ‘the Fed to the rescue,’” he said Friday on “Washington Watch.” “When there’s bad news in the economy, people say, ‘Oh, well the Fed’s going to — they don’t want a recession, so they’re going to pump money into the system.’”
“The market being down on bad economic news breaks the pattern, and it’s breaking it strongly. … Everything that points towards the fed pumping money into the system and rescuing the economy in the stock market went up, and yet the stock market still crashed,” Bowyer argued. “So that means, I think, we need to look for another explanation.”
For Bowyer, the alternate explanation is political. “If you follow the political futures markets … last night [Thursday], the probability market switched to [Vice President Kamala] Harris winning [the presidential election]. And then what do we have today? A broad selloff of markets, even when expectations of an easing Fed have increased,” he said.
Also on Friday, Harris officially secured the Democratic presidential nomination. Harris also performed well in several polls released on Friday, narrowing former President Donald Trump’s lead in the Real Clear Politics average of polls from 2.0% on July 30 to only 0.8% on August 3.
“Markets might be looking forward and saying that, with a Harris presidency, even the Fed can’t bail us out … by pumping money into the system,” suggested Bowyer. “Investors are looking out into the future. They’re looking at the Harris trade.”
During her time as a senator, Harris supported ambitious spending proposals such as the Green New Deal and a single-payer health care system, which are widely understood to have an inflationary effect.
Bowyer underscored “a real hollowness to the American economy that the bull market has kind of kept us from seeing.” According to Gross Output, a different measure of economic growth than Gross Domestic Product (GDP), “We’ve been in a business recession for about three quarters already,” he said.
Consequently, the best-performing investments right now are those used to hedge against recession or inflation concerns, he continued.
“Today’s sell off was broad. It wasn’t just the high-flying tech stocks or even the S&P 500. The Russell 2000, which is a very broad index, also sold off. Everything sold off, except gold and cryptocurrencies, which are hedges against some kind of future inflation,” he said. “But anything that depends on a healthy economy did quite poorly.”
Two sectors that survived Friday’s rout were health care and construction.
“Health care almost never goes down,” related Bowyer. “You might not buy a new house, but if you need a double bypass, you’re going to get the double bypass. You’re going to buy your medications even if you don’t go out to a restaurant.”
“The strength of the health care [sector] doesn’t indicate that it’s a strong economy. In fact, the strength of the health care sector in trading, relative to other sectors, is often an indication of a belief [that] the economy is slowing,” he reasoned. “Health care is a recession hedge. … If recession hedges are doing better than the rest of the stock market, that means that investors sense that a recession, or something like a recession,” is immanent.
As for construction stocks, “construction was actually doing badly for a while because, when you raise interest rates a lot … people don’t want to sell a house and buy a new house because they’re going to trade into a really high mortgage rate. And, if people aren’t buying houses, then we’re not building houses. But eventually you need to build some,” Bowyer explained. “I don’t think that we’ve seen a sustained period of good construction job growth. I think we’ve seen a little bit of a blip.”
Friday’s poor jobs report raised expectations that the Federal Reserve will cut interest rates at their September meeting, according to the “Fed Funds Futures Market … where investors can basically invest out, based on what they think the interest rate is going to be in the meeting in September,” Bowyer said. “Before yesterday [Thursday], they were expecting a quarter-percent cut. Now they are overwhelmingly expecting a half-percent cut in September.” At the meeting two months later, investors are now “expecting another quarter-percent [cut]. So, markets are convinced that we’re going to get almost a whole-percent cut just in the next two meetings.”
“When we expect the Fed to be debasing the currency, that’s supposed to make things easy. That’s like Prozac in the water supply. That’s like, taking your kids out for sprinkles and sugar,” said Bowyer. “Where’s the sugar high from the easy-money Fed? Well, we don’t get it because we have a Harris presidency hanging over us, suppressing the market, [which is] saying, ‘We don’t even think the Fed can rescue us.’”
“And if we get President Harris,” Bowyer concluded, “I think we can expect a lot more trades like this, a lot more days.”
AUTHOR
Joshua Arnold is a senior writer at The Washington Stand.
EDITORS NOTE: This Washington Stand column is republished with permission. All rights reserved. ©2024 Family Research Council.
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