Sahm Rule Triggered: Early Recession Signal and Market Reaction

$MicroSectors FANG+ Index 3X Leveraged ETN (FNGU.US)$
Recently, the Sahm Rule has been triggered with a value of 0.53%, signaling the early stages of an economic recession. Historically, this rule has been a reliable early warning sign, indicating that the economy is beginning to contract. However, it’s crucial to understand that the stock market doesn’t always react immediately. Instead, significant market downturns often follow several months after the Sahm Rule is triggered.

Historical Data Analysis
Here’s a summary of past instances when the Sahm Rule was triggered and the subsequent stock market performance:

- 1974 Recession: Sahm Rule was triggered in January 1974, and the market experienced a significant decline of 48% over the next 11 months.
- 1980 Recession: Triggered in January 1980, the market saw a 27% decline over the following 31 months.
- 1990 Recession: Triggered in July 1990, the market dropped by 20% within the next 3 months.
- 2001 Recession: Triggered in March 2001, leading to a 49% decline over 19 months.
- 2008 Financial Crisis: Triggered in April 2008, with a 57% market decline over the next 11 months.
- 2020 COVID-19 Pandemic: Triggered in March 2020, the market quickly rebounded due to swift government and Federal Reserve actions, but the initial drop was 34%.

This historical pattern shows that while the Sahm Rule signals the onset of a recession, the stock market typically does not crash immediately. Instead, significant declines occur over the following months, giving investors some time to adjust their portfolios.

Recent Market Volatility
The sharp market drop on August 5, 2024, was primarily triggered by Japan’s unexpected interest rate hike. This move caused panic among institutional investors who had borrowed yen at low rates to invest in higher-yielding assets like U.S. stocks. The rate hike forced these investors to sell off their U.S. stock holdings to repay their yen-denominated loans, leading to a significant market sell-off.

In addition to the primary factors, there were a few other contributing factors such as weaker U.S. jobs data and geopolitical tensions. The combination of these factors created a perfect storm that led to the recent market downturn.

Market Stabilization and Future Outlook
In response to the market turmoil, the Bank of Japan announced a pause on further interest rate hikes until market conditions stabilize. This announcement has provided some relief to the markets, indicating that central banks are closely monitoring the situation and are ready to act to ensure stability.

Debating the Accuracy of Sahm Rule
There is ongoing debate about the accuracy and reliability of the Sahm Rule as an indicator. While Claudia Sahm, the rule’s creator, and Federal Reserve Chairman Jerome Powell have emphasized that relying solely on this indicator might not be entirely accurate, it’s important to consider multiple economic indicators. Critics argue that although the Sahm Rule has been historically accurate, it should not be the sole basis for economic predictions.

From my perspective, given the Sahm Rule’s track record of accurately predicting recessions, I believe it is a reliable indicator. However, I also acknowledge that the market’s adjustment period and the actual economic conditions might vary. Therefore, while it’s wise to heed the Sahm Rule’s warning, it’s equally important to stay prepared and consider other economic signals to avoid being caught off guard by sudden market downturns.

Recent Trading Activity
Some followers have asked about my recent trading activity with TMF. Here are the details:

- TMF ETF: I sold all 400 shares of TMF at $61.30 each. The primary reason for this sale was the market crash on August 5, 2024, which caused significant panic. Major ETFs like QQQ and SPY also experienced substantial drops. During this period, markets in South Korea and Taiwan almost hit circuit breakers and halted trading. Additionally, some U.S. brokers temporarily halted trading, preventing users from buying or selling stocks.

I noticed a downward arrow on one of my indicators, signaling a potential peak. Given these conditions, I decided to sell TMF and redirect the funds into QQQ and FNGU, which are leveraged ETFs tracking the performance of major tech stocks. I believe there will be a short-term rebound due to the oversold conditions, providing an opportunity to profit from the bounce.

My plan is to take advantage of the anticipated 10-15% rebound and then sell the ETFs, possibly reinvesting in TMF or similar assets. This strategy is based on capturing short-term gains from the rebound rather than a long-term bullish outlook on the market.

Final Thoughts
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