Sahm Rule Recession Indicator

Hey everyone and thanks for jumping back Into the Macroverse today we're going to talk About the S rule recession indicator if You guys like the content make sure you Subscribe to the channel give the video A thumbs up and check out into the Cryptoverse premium at into the let's go ahead and jump in so This indicator has been Making Waves Over the last few days and a lot of news Articles about it a lot of people on Twitter talking about it so I did think That I would at least come in here and Provide my two Satoshi on the matter so One of the things is first of all we Need to understand what it is we're Talking about okay so the S rule Recession indicator is was developed by An economist named Claudia who's Actually somewhat active on Twitter uh I Would encourage you to to actually go Follow her uh for some useful insights Into the economy but it's basically Based on the idea that and I'll link her Twitter in the uh in the description Below but it's basically based on the Idea that changes in the unemployment Rate can be used to identify the onset Of a recession now there have been a lot Of news articles over the last few days That have come out and said that the Som Rule recession indicator was triggered However that is not true okay now the

Reason it's important to note whether it Has been triggered or not is because Normally when it is triggered that Typically marks the onset of a recession Within a few months right within about a Three-month window it tends to Mark the Onset of a Recession and if you think this is the First time I've ever spoken about this Indicator that's actually not true we Spoke about this indicator I believe Almost a year ago and we noted back then That it was nowhere close to you know to To to triggering that that that Threshold right at the time it was only 0 3% 0.3% today it is at 33% but the trigger will not happen Until it reaches .5% now where are these percentages Coming From the rule states that if the 3month Moving average of the unemployment rate Increases by 0.5 percentage points or More above its low for the previous year It is considered a recession signal this Indicator is considered simple and quick To use and has been shown to be a Reliable indicator of recessions in the Past now we're going to figure out Whether that's true or not right so Let's go take a look at the last several Recessions and see what happened once

This indicator triggered okay so we'll First go back to to 2020 you can see That it triggered but in this case when The trigger occurred the Market had already bottomed right but When it was at around. 27% from the from the mark of. 27 to 4% Which is a huge move in a single month That's that's where the S&P 500 Capitulated okay if you go back to more Typical recessions right where they're They're longer they take years to play Out go back and look at the financial Crisis once and by the way this gray Line here that you see going across the Page that is the 0.5% threshold so you Can see it triggered here in February of 2008 and of course you can see what Happened to the S&P 500 after it nothing Good occurred in the S&P 500 after it After that basically for the next year The market just went down for Essentially a year straight uh with with Occasional rallies right just to keep You interested but It triggered in February the recession Was eventually Backdated to December right to December but it again It triggered in February back date to December and then it lasted until June Of 2009 okay so in this case it would Have been a good signal right I mean had You waited for this to Signal you would

Have missed the top right but even you Know even getting out or taking some Profits even at just off the highs you Would have avoided a majority of the Downside okay now let's go look at the Crash where did it signal it signaled in June of 2001 the recession started in March right so again it tends to be good To within about a thre Monon window or So now what happened after it triggered In June the market had actually topped one Month earlier okay and that was just a Lower high it wasn't even sort of the Cycle high it was just a lower high and After that starting from you know Starting from June 2001 when it Triggered the market did not even bottom Until October 2002 so again we had Another full year where the market went Down so those were the last two major Recessions that we've had where the S Rule worked out pretty well right like Had you just waited for it to trigger And and then adjusted your strategy it Would not have been the worst strategy To go With you might ask well why wait I mean So there there is this thing of like it It sometimes goes up but then doesn't Actually hit that trigger right now has It gone up to this level before without Without hitting that trigger I don't Know I mean 33% is pretty high I mean

You can see that when it when it hit it Last cycle ended up leading into a Recession same thing cycle before same Thing cycle before I will say by the way I was reading through Claudia s's tweets Her Expectation unless I unless I misread But her expectation is that this will Trigger in early 2024 but she also thinks we'll avoid a Recession for what it's worth okay So those are probably important things To consider as well so I think there's a Lot of you know there's a lot of Unknowns in this economy right you have You have the stock market which had its Seasonal correction and and it's now We're trying to figure out if it's just Doing what it normally does in Q4 which Is sort of goes sideways and and maybe Slightly up or if we're pricing in a Recession uh that all Still Remains to Be seen and even if a recession occurs It doesn't mean that the market can't Rally into it often times markets rally Into recessions right often times it Rallies into recessions and we're sort Of at an interesting point where anyone Who is bullish on the market will of Course point to price action and why Shouldn't they right price action is King and and use that as Justification that you know that that That new Highs are coming and again the

S&P can put in new highs going into a Recession it's it it often occurs not Always I mean in the dotc crash you can See that it had already rolled over and Was turning down but in the financial Crisis you know just before the Recession the S&P put in a new high like It is possible that sort of stuff is Possible and of course the people who Are bearish we will simply just Say re you know rallies into recession Are pretty normal right so again I mean You can you can take either side uh There's no guarantee my expectation for What it's worth I think we will likely Have a recession uh if we don't I would Expect it to be a recession scare kind Of like 2016 where you come close to one And the market still sells off to some Degree but it doesn't sell off as badly As people think it will right so I think We'll probably have a recession at the End of this business cycle um but again How long that takes that's that's really Anyone's guess I mean at this point it I It's the economy has been holding on for For a long time so Far so we we've sort of covered the last Three now let's go back and look at at At the the late 80s because here you can See the recession the Su R recession Indicator triggered in October of 1990 and then the market Bottomed basically right after it almost

In that month it Bottomed also keep in mind though that The SNP right you can see here in July Of 1990 had a pretty sizable correction Right let's go let's go figure out Exactly what that correction was uh just So we just so we have it Um on hand okay so this is it right here This is the correction that the S&P 500 Had you can see that it started here in July of 1990 and the S&P ended up Dropping about 20% about a 20% drop and You know Ju ju was red August was red September was red and October was red so You essentially had four red months in a Row and you had a recession right and Even though I mean even though the Market bottomed out in October it didn't Really go I mean it didn't really take Out these prior highs until February of 91 right so it wasn't until the Following year that it took out those Highs but again this is an example where The S rule triggered recession warning In October and then the recession ended Up being backdated to July so again Within about a 3-month window it was Fairly accurate in predicting the onset Of recession but in this case it was not As successful in helping to Identify you know Mar you know Market Activity over the next Year if you had sold in October of 1990

When this signaled and waited a year Right and you got in in October of 91 The price would have actually been Slightly higher not much higher from Where you would have sold at um but a Little bit higher right I mean you're Talking about a move from you know 314 up to up to 386 right so it's it's a Somewhat significant move so it shows You there's not even with these Indicators that have a pretty good track Record of predicting when the onset of a Recession occurs it's still hard to say If following that strategy is always Going to work out and and you know the Early 1990s is a great example of that Now we can go back and and look at at These other Cycles um perhaps let's just Go in order starting in in 1970 the S Rule recession indicator triggered in March looks like it triggered in in March of 1970 and The S&P then dropped from around 88 down to around 69 okay so a somewhat Sizable correction by the S&P after the Som Ru recession indicator triggered and Once it triggered in February or sorry In yeah in in in March the recession eventually was Backdated it looks like to December so Again about a 3month window from where The recession Started then if you look at 1973 1974

You will see the S rule recession Indicator triggered Here in July the recession the recession After it triggered in July the recession Was eventually backdated to November so That ended up being backdated by about Half a year okay now after it triggered The market still sold off right so you Have an example in in in 1970 where the Market sold off after it triggered an Example in 1974 where the market sold Off after it triggered and then let's go Look at the 80s here's an example where It triggered in February the recession Was backdated to January so within that Three-month window and what ended up Happening is after it triggered the Market went slightly up to about 118 and Then dropped a good amount right I mean It dropped you know somewhat consider Considerably down to about less than 100 Right so you're talking about a 20% drop After after that trigger occurred and Then finally you had one other trigger Here we had two recessions in the early 80s sort of back to back you had it Trigger in November of 1981 and we're G have to zoom we're Going to have to fix this and sort of Zoom in here right so it triggered here In November of 1981 the market the S&P At the time was around 121 and over the Next year it sort of made its way down To about 100 so again about a 20% drop

After the trigger occurred okay so out Of 1 two 3 four five six seven eight Recessions seven of Them it you know selling maybe I Shouldn't say it like that right seven Of them the market went down Significantly after it triggered but one Of them did not and that was in in the 1990s again It hasn't even triggered yet right it Hasn't even triggered yet now we could Perhaps go look at there's four other Examples so just for the sake of Completeness we will go through them I I Don't really want to leave any stone Unturned over here so this first one Over here you know we really don't have Enough data for because I mean it you Know the recession was already sort of Ongoing um when we even had this uh and You can see that the market did Eventually fall so I mean it seems like It probably would have worked out uh if If you go look at the next three Recessions here's an example and I was Looking at this one before I made this Video and it was one of the reasons why I made the video because this shows you A completely different outcome where it Triggered in 1953 and then the market just went up Right the market just went Up it then triggered as well here in 1957 the market dropped a little bit

Right a little bit hung out at those Lows for a few months and then went up In this case in in in this last case it Triggered in November the recession was Backdated to June So within a few months Here it triggered in October the Recession was backdated to August so Again within that three-month window and Then Finally here you can see that it it it It got a false trigger right I mean it Went above it but it didn't really mean Recession immediately we actually came Back down for a few months and then it Went up and then after it triggered Again the market went slightly lower and Then it just went up right so what does This tell us it tells us that there is No sure thing with this stuff right I Can look at this I can look at this and I can pick out and a majority of these Cases a majority of the cases the market Went down after it triggered right we Had a you know pretty bad recession in a Lot of these cases but there are some Cases like 1990 And like in the in the 50s Where it it did not provide as much of a Of of of of a useful tool in terms of Navigating the markets now it has Generally been a greedy a great tool for Identifying if you're in a recession Right in almost all of these cases you

Know except for that one that we just Looked at right here and again a Recession eventually came right just a Few months later but generally speaking When it Triggers it means there's a recession Right as you can see right if it Triggers if we go above that 05% level It has historically meant Recession now some of the times the Market sold off a lot over the following Year and then other times it didn't so Again this is why investing uh is macro Macro investing is is very difficult Because you can find something that Might work 70 or 80% of the time but it Doesn't mean that it's going to work Every time Right and so building out a strategy Around that could work and is likely to Work but there's an example there's There's reasons why it might not and That's why hedging is always a good a Good thing to do I mean if anything that I've learned over the last several years Of investing hedging is always a great Thing to Do always you know and and I've I've Learned it consistently right it's Always a good idea to have a hedge it's Like with crypto you know you can you Can look at the market and and and think Of reasons why there's risk but being Exposed in some way can can often be

Helpful right it it helps calm the the Fomo that exists and that's why I've Said right that's why we focus on on Things like Bitcoin dominance because it Gives you exposure to crypto through Bitcoin if you want it while minimizing The the risk that the altcoin market Brings now again today is a great day Where a lot of altcoins are going up and And I know people are are feeling that Fomo but um you know I'll still Stand By My Views that that that the Bitcoin Dominance will likely continue to going Will likely continue going higher and And it does protect you from the from The downside risk of the altcoin market Doesn't mean you can't make money uh Just like the S&P I mean you know the S&P can often rally into a recession um But it's just something to consider so Where are we today Again it's starting to move up pretty Quickly because just a few months ago it Was essentially at 0% I we were at the Lows we were at the Lows but it's starting to move higher And it's also starting to move higher Pretty quickly so if you were to look at A month-over-month percentage change of It you can see that it's starting to Move up quickly okay and the the rate of Change is going up and the reason is Because the unemployment rate has been Going higher now if you were to look at

The unemployment rate one of the things You'll notice Is it had been doing some some Pattern right there there was a pattern That had been following for a while and It seems like it it might be breaking Out of that pattern that basically that Pattern was Um sorry let me just zoom out here the Pattern that it was sort of doing was it Would it would spike up and then just Spend the next few months going back Down Spike up two months going down Spike up two months going down and then It spiked and instead of going down it Went sideways and then it went up so Something has changed changed now how Will the Som rule recession indicator Trigger what would cause it to trigger Well you would need to see continued Prints at higher levels it is not I mean So so one of the reasons why I think a Lot of people thought that the Som rule Recession indicator triggered is because The low for the unemployment rate the Low for it was 3.4% right and now the unemployment rate Is at 3.9% so it's you know you can see it's It's a half a point right off the lows Half a percentage off the lows from 3.4 To 3.9 but as we said earlier the Su R Recession indicator is based on the 3month moving average of the

Unemployment rate there's a lot of noise In any given any single data point right A lot of noise in any single data point And so by smoothing it out so getting Say like a three-month moving average it Smooths out all this noise and you can See Here um just how you know just how much Cleaner it is to look at just sort of The pink line and and you can see how it How it sort of just cuts through the Data and it Smooths out the noise so the 3-month moving average is now at 3.83% the unemployment rate is at 3.9% if you get another month where Let's say the unemployment rate is at 3.9% then it's going to that that metric Is going to get pretty close to Triggering if it goes to 4% % or 4.1% I Mean if you let's say you get two months Where it goes to 4% it's going to Trigger right it would it would trigger In that case so it all depends on on if It triggers or not and again I mean I Don't know the answer to that question I Mean there's there's risks that it does It seems like the market is is softening Up um you know if you look at continued Claims we can see that they've gone Higher indicating that people are having A harder time finding a new job job once They get laid off but initial claims Remain relatively low right initial Claims remain relatively low so again

It's really hard to say it's really hard To say and and and even if it does Happen it's hard to say at what at what Rate it happens there's a chance that The unemployment rate next month comes In lower like maybe it comes in at at a Lower valuation gets everyone to think That it won't happen and then in in 2024 It goes to the upside so just as a Reminder that the person who created This indicator thinks that it will Trigger in early 2024 okay um I think They're suspecting that whatever comes In December will not be sufficiently High to to cause this to get to to cause The the the three-month moving average To get to 0.5% if we had to think about The three-month moving average for a Second right the last three data points Have been 3.8 3.8 and 3.9 okay that's why it's gone up so much Is because it it went from including This data point down here at 3.5 in July To not including it at all right so Instead of including any of these data Points down here it's now just looking At 38 38 and 39 so if you get another Print at 39 and then it replaces 38 with 39 you can see how it's going to slowly Go up if it goes up to four or 4.1 then it's going the three-month Moving average is going to go up even Quicker and the issue for the fat is if It starts to go up too quickly then they

Could be stuck in a rock in a hard place Where you have inflation still high and The labor market showing weakness the Counterpoint though is if the labor Market doesn't show weakness then that Could very well likely be a a Tailwind For inflation so I mean it basically Just makes the problem last longer than It otherwise needs to be um so that is The Som rule recession indicator I Wanted to do a video on it because it Seems like there had been a lot of People talking about it in the news and Stuff and and saying that it had Triggered and it actually hasn't Triggered yet there are some individual States I believe that it has triggered For so if you were to look at all the Different 50 states you'll I think You'll see that for some of them uh it Is starting to trigger but still for a Lot of them it it hasn't yet um but this Is a useful indicator and and we'll We'll continue to follow it there aren't Really many examples I mean one of the Most common questions I think I saw was Why 0.5% right I mean there's not a lot of Examples where it even got this high and It didn't eventually cross the line Right like if you were to look back at At 33% when's the last time it got that High and did not eventually trigger the

Warning um just sort of looking at the Line across the page at that level I Don't really see anything in in I mean Here's here it went to three so it got Pretty Close but yeah I'm not really Seeing many examples here here's an Example so here's an example in 1951 Where it went to 33% and and then it just came back down So it did not it did not trigger right And that happened in November November Of of 1951 this one here we're at 33% in October of of 2023 so I I guess it Depends on it really I mean a lot is Riding on the labor market right there's A lot riding on the labor market for People that are you know that are that Are buying risk assets right now I Imagine they're counting on a soft Landing um which is not completely out Of the question right and and for people Who are who are more risk averse they're Probably more so thinking that the labor Market continues to show weakness and Look I would say that this is a useful Indicator it's not everything um and Again the person who created it thinks I Believe that it'll break next year I Think she I think she said that she Thinks that it will um will trigger but Her base case is that a recession will Not occur um so again I'll link to her

Twitter so you can follow her uh and um Yeah I think it's a a good indicator to Take a look at and and and also just as A friendly reminder Right it often means when it triggers it Often means bad times are coming but There are a few cases where it has not Meant that okay so please remember that There are a few cases where it has not Meant that although the vast majority of Them we did see a a fairly significant Selloff in the S&P after it triggered and especially in In the last two major recessions right After it triggered um and and by the way If you if you look at the last couple of Recessions you can see it started to Move up got to around that3 level and it Only took another couple of months Before it triggered that was in in the Financial crisis in the dot crash you Can see it hit 3 % which is where we are Right now in March and then it it still Didn't trigger until July right so it Still took a few months before it Triggered and the reason that can happen Is if the unemployment rate you know you Can kind of see it right like if it is Moving up but there's still a potential Where it it comes back down finds like a Higher low right you have you know you Have 3.4 and then 3.4 and then 3.5 There's always an example where it could Come back down to 3.6 or

3.7 and and then delay this whole thing By by a few more months right so there's Always the the the risk that that Happens as well anyways I think we'll go Ahead and wrap it up there um this is Just on the on the S rule recession Indicator hopefully you guys enjoyed it And uh we will of course talk more about Uh more about the markets in in upcoming Videos I I always sometimes feel bad About making these videos because I know People more so care about about the Markets um and especially with you know Bitcoin is is here at at at 35k so I'm Sure everyone is watching that uh the Next video that I do will probably be on On bitcoin and looking at it looking at How it has historically behaved with Respect to tightening cycles and and um At least a few data point you know the One data point that we have um but we'll Take a look about at that hopefully in The next video but yeah I I I don't mean To to just not talk about uh the markets As frequently it just seems like a lot Of this macro stuff that we've briefly Discussed over the last year is starting To make moves and it seems relevant to Follow it especially when you get a move Like this right when it goes from 0 2% To 33% in a single month I mean that is A big jump for for something like this There's one last thing that I know a lot Of people have have looked at as well

And and that is the another way that That some people sort of measure the Onset of a recession is when the 36-month moving average of the Unemployment rate so when the Unemployment rate goes above the 36-month moving average right so like Here right that marks sort of the onset Of a recession right onset of a Recession onset of a recession Etc right When it when the thre Monon or sorry When the when the unemployment rate goes Above the 36 month moving average right And if you were to Overlay like the S&P Onto this Chart right one of the things you'll see Here right where it crosses it you can See what the S&P did after it crossed it Same thing here after it cross the the S&P dropped Considerably um here so let me just go Through them in 70 1970 you can see that It crossed right here in October again The market fell for just about a half a Year before rebounding and then came up It crossed again in June of 74 before The market bottomed out in November it Then crossed again in March of 1980 I believe maybe let me see see if I Can zoom in here cross sorry January of 1980 uh the market had a little bit of a Drop right maybe about a 15% drop or so From 115 to 100 or so um and then it Just went up and

Then yeah so those this here's another One so here's the one here's the one From 1990 where we went above it the Market immediately sold off and then That ended up being the low right uh Before it it took off Again Here it is I think we covered this one From 1969 so you can see I mean you can See in general like when it crosses and Again there's the 50s where it it was Not as useful of a sign of a signal as As the S rule showed us right so looking At it today just for reference for those That are curious the 36-month moving Average is at is at Um 4.38% 4.38 and we're currently at at 3.9 So just something to consider anyways Guys we'll wrap it up there thank you Guys for tuning in make sure you Subscribe give the video a thumbs up and I'll see you guys next time bye


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