QUOTE OF THE WEEK
“And remember, no matter where you go, here you are.” – Confucious
TECH CORNER
Last Friday, August 6th, the August employment report came out. At first blush it didn’t seem so bad. New employment dropped to 142,000 new jobs but the expectation was 161,000 new jobs. The stock market reacted by opening up until reality set in. The reality came in the form of the downward revisions for June and July. June was revised down by 61,000 jobs and July was revised down by 25,000 jobs. Then the stock market crashed turning in one of the worst days of 2024, then, rebounded on Monday but is still looking very weak as the value is still below its channel.
The Friday employment report also showed that unemployment dropped from 4.3% to 4.2%. However, the Sahm Rule rose to 0.58% Every time the Sahm Rule has been triggered a recession has followed. Remember the Sahm Rule is a real-time indicator that helps economists and policymakers identify when the economy might be entering a recession. The rule is triggered when the three-month moving average of the unemployment rate increases by 0.5 percentage points or more than its lowest point in the previous twelve months.
Unemployment is one of the two coincidence “meaning current” indicators of being in a recession.
The other coincidence indicator is the widening of credit spreads. A credit spread refers to the difference in yield between a corporate bond and a Treasury bond of the same maturity. What this means is how much in excess the corporate community has to pay in interest to issue bonds or borrow money. If credit spreads start to widen, corporations and businesses have to pay more in interest to borrow money. If interest costs go up that affects the bottom line or profits. If profits go down the stock or business value goes down. Current economic policy is draining money out of the system thus reducing liquidity in the system. When there is less money in the system there is less money to loan. Combine that with a slowing economy affecting business bottom lines, banks are less willing to loan unless they get a higher interest rate, thus interest rates are rising on bond issuance or corporate loans. When credit spreads widen enough, recessions follow.
As far as being in a recession we aren’t quite there yet but we are preparing for one.
After being defensive for so long, we see an area for opportunity and we are making some changes to the allocation to add some returns to the models. The new allocation is designed to take advantage of what we believe will be a turbulent environment headed into the election and a possible recession. We are still staying in U.S. Government backed bonds to avoid any default risk, but we are extending the duration to boost returns while still protecting us from the downside.
