Strong economic data buoyed investors last week

Employment

In previous discussions, I've highlighted the "Sahm Rule," a historically reliable leading indicator for predicting an impending recession. This rule examines the relationship between the 3-month and 12-month rolling average unemployment rates. A recession is signaled when the 3-month average surpasses the 12-month average by at least 0.5 percentage points.

Recently, the Sahm Rule flashed a warning when the 3-month unemployment rate climbed 0.53 percentage points above the 12-month rate. A month later, this increased to 0.57 points. However, last week's job report provides a glimmer of hope as the gap narrowed back to 0.50 points.

This development is indeed promising and resonated positively with investors, pushing the markets close to record highs last Friday. Nonetheless, it's crucial to note that the Sahm Rule is still technically activated at 0.50 points. A further dip in the numbers next month would likely solidify confidence in the economy's health. Conversely, should these numbers tick upward, it might ignite investor anxiety. Until there's clear economic direction, expect continued market volatility.

It's worth mentioning that since 1960, the Sahm Rule has only presented one false positive—during the 1969-70 recession, which it predicted prematurely. Therefore, even if the Sahm indicator stabilizes or retracts, the possibility of a future recession cannot be entirely dismissed. Given the unprecedented conditions facing modern economics, predicting future movements remains a complex challenge, again contributing to market volatility.

Wages

In addition to encouraging employment data, recent figures also revealed robust wage growth. Year-on-year wage growth hit 4%, while PCE Inflation is nearing the 2% mark. This pattern, where wage growth outpaces inflation, has persisted since March 2023, enhancing consumer purchasing power—a necessary recovery from periods where wages lagged behind inflation at its peak of around 7%.

Analyzing from another angle, prices have surged 18% since 2020, whereas wages have risen 20%. Between January 2022 and July 2023, consumers grappled with prices outpacing wages, eroding their purchasing power. Fortunately, since January 2024, this trend has reversed, with wage growth eclipsing price inflation.

Conclusion

As we navigate this dynamic economic landscape, it's crucial to approach the data with a balanced perspective. While the stabilization of the Sahm Rule offers hope and robust wage growth bolsters consumer confidence, the possibility of economic shifts remains. Investors and consumers alike must stay vigilant, informed, and prepared for the uncertainty that comes with economic recovery. By doing so, we can better weather potential fluctuations and seize opportunities for sustainable growth.

When assembling your investment portfolio, be sure to consider whether you can handle the losses associated with a recession. If not, consider adopting a slightly less risky portfolio allocation. Contact us today for a free assessment of your financial health and portfolio allocation.