What this chart shows
This chart shows the Sahm Rule Recession Indicator (Sahm Rule) from 1960 to July 2024. The shaded areas represent periods of US economic recessions, as identified by the National Bureau of Economic Research. The Sahm Rule states that when the three-month moving average for unemployment in the US is 50 basis points higher than the minimum of the three-month moving average of the preceding 12 months, a recession is triggered. The indicator was developed by Claudia Sahm, an American Economist, who introduced the measure during her time working at the US Federal Reserve as a policy proposal to address recessions. The Sahm Rule has correctly predicted every recession since 1960. July’s recent US unemployment figures rose to 4.3%, moving the three-month average 0.53% higher than the 12-month minimum, triggering the Sahm Rule.
Why this is important
In recent months, equity markets have been especially attuned to the Fed’s policy decisions, with interest rates in America currently at a 16-year high in response to rampant inflation both domestically and globally. After remaining stubbornly resilient for the past couple years, the economy is now showing signs of cooling down, particularly in the labour market. This slowdown has buoyed expectations that interest rates will be cut sooner rather than later, initially boosting stocks as lower interest rates alleviate pressure on consumers and company debt burdens. However, the latest unemployment figures and triggering of the Sahm Rule have stoked fears that the slowdown has gone too far, contributing to the recent rout in global equities and spike in volatility. Although historically accurate, the Sahm Rule is vulnerable to be disproven. Even its founder notes that US household income is still growing, and consumer spending and business investment remain resilient. Indicators remain such – only indicators – and it is important not to get carried away with both market exuberance and gloom. Being exposed to a portfolio that can be resilient in multiple scenarios provides a robust way to navigate the current macro environment.
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Source: Momentum Global Investment Management, Bloomberg Finance L.P. Data to 19 September 2023.
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