The Pomp Letter: Are We in a Recession and Should You Be Worried?

Markets may have sold off largely from traders exiting the carry trade. But last week’s job data suggested another concern that markets may not have priced in yet. By at least one standard, it’s possible that the economy has entered a recession.

That’s based on a concept known as the Sahm rule. Under this rule, the economy is in a recession if the unemployment rate increases 0.5% from its prior 12-month low.

Over the last 65 years, this signal has had a 100% success rate. However, the creator of the rule notes that due to the pandemic-related job market and immigration, the rule may not be holding up quite yet.

For now, further data is needed to support the notion of a recession. The latest GDP data, for instance, suggests that the economy is fine. And inflation, while trending lower, is still high enough to suggest that economic activity remains strong.

Time will tell if this rule holds, or if there was just a technical breach this time around. One rule alone may not be a sign of a recession, at least right away.

For now, traders may want to get more cautious. While we may not be in a recession, the economy is slowing. And markets are showing some late-stage fragility that suggests that investors avoid leverage and invest in more defensive sectors such as utilities and gold.

To read the full explanation of the rule, click here.