#97: Are we heading towards a recession?

Author

micksonmatch
July 09, 2024

I am late. I have spent 4 hours trying to debug what should have been a really simple task. So frustrated!!

S2N Spotlight

I came across many market commentators calling for a recession based on the latest Sahm Rule Recession Indicator reading of 0.43.

The Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.This indicator is based on “real-time” data, that is, the unemployment rate (and the recent history of unemployment rates) that were available in a given month.

Source:

Sahm, Claudia, Real-time Sahm Rule Recession Indicator [SAHMREALTIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SAHMREALTIME, July 5, 2024.

I decided to do my own homework and see how good a signal the Sahm Rule is for the SP500. As you can see below the indicator on its own is not a good indicator of future SP500 performance. It has been an excellent predictor of a recession but the stock markets and recessions have a different time frame, so don’t rely on this indicator on it own.

S2N Observations

The 2 year holds the key to what will happen with short term rates. I have to say that it looks like rates will come down from here.

I have also being hearing a lot about the large caps killing the small caps. I came across a well known commentator plotting the SP500 / Russell 2000 making the point that we are basically at the high’s of the 2000’s. I couldn’t get my chart to behave like his at first. It turns out the reason why is because he was using total return (price + yield) not just price. So in the plot below I have done what he has done and it makes for a nice headline.

The more I think about it I am wondering if the data “tweak” was nothing more than hunting for a headline i.e. noise, and not a quality signal. So I am sharing below the less dramatic version. We all know that small caps are more growth type companies who typically pay less dividends if any, so is the top chart a fair play? I will say that we have definitely seen a major outperformance that might need to normalise some time soon, no matter which chart you use.

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