Is this a correction or a recession? What to know amid the international market plunge
International markets plunged overnight, leading to a drop in the U.S. markets on Monday after investor worry about a possible upcoming recession, a panic that has been building for days.
The S&P 500 Index was down 8.6% and the NASDAQ 100 fell 5.4%, as of Monday morning, and tech stocks including Apple, Amazon and Google declined sharply. Investors have purchased U.S. treasuries, leading a decline in mortgage rates.
Greg McBride, chief financial analyst at comparison site Bankrate, said that the "refinancing door has swung open" for people who took out a mortgage at a rate above 7%.
Here's what you should know.
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What is a correction and what is a recession?
A correction is a market drop of at least 10% from a recent high, which typically occurs about once a year.
According to the World Economic Fund, there is no globally recognized definition of a recession. The National Bureau of Economic Research says a recession is a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."
An "earnings recession" occurs when there has been earning declines or negative earnings growth for at least two consecutive quarters. According Forbes, during an earnings recession, a majority of company profits declined "year-over-year for two or more quarters in a row."
A bear market is when a stock or market index falls 20% or more, and a bull market is a sustained rise in stock prices without a bear market, or 20% drop.
How likely is a recession?
While some economists say current market conditions raise the risk of a recession within the next 12 months, others are downplaying concerns.
“The recession fears are overblown,” said Scott Wren, senior global market strategist at Wells Fargo. “It’s not time to panic here.”
Wells Fargo economists Monday said they expect an economic slowdown – not a recession, noting the labor market is in the early stages of weakening and “still some distance away from even the most moderate, modern recession,” which took place in 2001. The bank’s analysis, led by Paul Christopher, head of global investment strategy, also notes that consumer spending has potential to grow as household purchasing power strengthens.
“The recession risk was not zero a month ago. It wasn't zero 6 months ago,” Wren said. “You could probably make an argument that it's a little bit higher today than it was last week, and that's only because the labor market report was weak, but we still think a recession is not going to happen, that it's a relatively low probability.”
Goldman Sachs Group economists Sunday raised the probability of a U.S. recession within the next year from 15% to 25% but see recession risk as “limited,” according to reporting from Bloomberg and other outlets.
Recession worries stem, in part, from the July job report’s triggering of the Sahm rule, a measure that says if unemployment based on a three-month average rises by at least a half percentage point over the past 12 months, the nation is likely in a recession.
Claudia Sahm, a former Federal Reserve economist, has cautioned against taking too much of a signal from her namesake rule in a post-COVID labor market. She told Bloomberg Television “it is very unlikely that we are in a recession,” but “we’re getting uncomfortably close to that situation.”
“A really important question is, where are we headed?” Sahm said. “And those changes in the employment rate that the Sahm rule picks up on do not look encouraging. They're headed in the wrong direction, and that momentum is what can get us in trouble."
How long do recessions last?
There is no fixed time on how long a recession will last, and it ends when economic growth resumes. A recession may last only a few months, but it could take the economy years to recover to its former peak, Investopedia says.
Do interest rates go down during a recession?
The World Economic Forum says central banks can lower short-term interest rates, which can help increase consumer spending high-cost items like cars or homes. Governments can also add policies like tax cuts or begin infrastructure programs.
Is a recession good for home buyers?
If you're ready to buy a house, a recession could mean good news for the cost of borrowing.
If banks lower short-term interest rates to help end a recession, the cost of borrowing money for high-priced items like homes or cars is lower, which can lead to an increase in consumer confidence and spending, the World Economic Forum said.
Contributing: Bailey Schulz, Medora Lee, Paul Davidson and Dan Morrison, USA TODAY.