As we entered August, the market shifted direction, retreating in response to a weaker jobs report and an unexpected interest rate hike by the Bank of Japan. Despite the market pullback, Q2 earnings are projected to rise by 11.5%, marking the strongest quarter since late 2021.
(Source: FactSet)
As investors assess the current market risks and their potential impact on future corporate profits, the strong performance in 2024 for corporate earnings have been steady throughout the year thus far.
Sahm Rule – Recessionary Indicator?
A recent economic headline focuses on the Sahm Rule, a widely recognized recession indicator. The rule suggests that if the unemployment rate increases by at least half a percentage point from its 12-month low, a recession is likely on the horizon. Economist Claudia Sahm first introduced this rule in October 2019. The rule’s simplicity lies in its premise that once unemployment rises by 0.5%, it becomes difficult to reverse that trend, prompting policymakers to act swiftly to mitigate further economic decline.
Claudia Sahm has recently appeared on several major networks to discuss the rule and her current perspective on it. Interestingly, she believes that the weaker-than-expected July jobs report does not indicate that we are in a recession at present. Sahm stated, “We are not in a recession now—contrary to the historical signal from the Sahm Rule—but the momentum is in that direction. A recession is not inevitable, and there is substantial scope to reduce interest rates.”
(Source: Fundstrat)
The chart above revisits every instance since 1949 when the Sahm Rule has been triggered. Out of 13 occurrences, 11 times the U.S. was already in a recession. The two exceptions were in November 1959 and July 2003, where a recession followed the rule’s trigger—starting five months later in 1959 and 53 months later in 2003. While one could debate whether a recession beginning 53 months—or nearly 4.5 years—later still signals an imminent downturn, it’s important to note that a recession, if approaching, may not be immediately around the corner.
One major reason Claudia Sahm is questioning the rule’s current relevance is the way the labor force is calculated. During the COVID-19 pandemic, many people did not attempt to return to work and were therefore not counted in unemployment statistics since they weren’t actively seeking jobs. Now, some of these individuals are re-entering the workforce, leading to a spike in unemployment. While company layoffs might trigger more concern, this initial increase is more about non-workers becoming new entrants rather than people losing their jobs.
Volatility is the Price We Pay
As August kicked off with a wave of selling pressure in the market, it serves as a timely reminder that volatility is a common feature of the market landscape. In today’s media environment, it’s important to remember that sensational headlines are part of the business, and market selloffs are not unusual.
The chart below illustrates the frequency of 3%, 5%, 10%, 15%, and 20% corrections in the S&P 500 during any given year since 1928.
(Source: Carson Insights)
A recent example of this is in 2023, when the S&P 500 gained over 24%, despite experiencing a 10% correction in late October. Market pullbacks are a normal part of investing and often feel more significant in the moment. Keeping emotions in check is key to making sound investment decisions.
Articles We’re Reading
Rate futures pricing in 95% chance of September cut after latest FOMC announcement, up from 89% before release (Reuters)
Department of Education gearing up to issue mass student loan forgiveness (CNBC)
Americans still largely spending historical same amount of after-tax income on housing, despite high prices (Yahoo Finance)
Mexican president Obrador says there was no evidence of fraud in Venezuela election (Reuters)
Market Snapshot
For the Month Ending 7/31/2024 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
The Summer Olympics have a rich history dating back to ancient Greece, where the first recorded Olympic Games took place in 776 B.C. These ancient games were held in Olympia and featured only one event—a foot race. The modern Summer Olympics, revived in 1896 by Pierre de Coubertin, has grown to include over 300 events across a wide range of sports, bringing together athletes from around the world to compete every four years. The games not only showcase athletic talent but also promote global unity and peace through sport.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
