Dear TuringTrader member,
What a difference a day makes. Until mid-July, the stock market was taking off like a rocket-ship. Then, some doubts about the economy settled in. And when the unemployment figures came in on August 2nd, all hell broke loose. But as I am writing this on August 6th, we are already back to business as usual, recouping much of the previous losses. What a rollercoaster!
Investors get bombarded with news every day. Experts of all couleurs chime in, oftentimes presenting historical precedence to support their case. And it seems that headlines about a looming recession always create attention, so there is no shortage of sensational commentary.
Naturally, investors are looking for leading indicators to gauge the outlook on the future and guide their investment decisions. And two indicators are most-often used to signal a looming recession: the yield-curve, and the Sahm Rule.
As technical analysts, we love rules like this because they are methodical, easy to implement, and remove all emotions from the investment process. But it is important to take these rules with a grain of salt. Before blindly applying them and rushing decisions, we should think about cause and effect, and the overall economic environment we are in. In particular, I’d like to make two points:
- The yield curve is inverted, because the Fed made it that way. As part of their monetary policy, they will reduce rates when they see fit, and this will go away. There is absolutely nothing that says that a recession has to follow. It sure will at some point, but that’s like saying after sunshine comes rain. Unfortunately, historic precedence shows that the Fed has seldom been successful in engineering a soft landing. Nonetheless, we should give these guys a chance to do their job before betting against them.
- Similarly, unemployment ticks up, because the Fed wanted it that way. In order to fight wage inflation, it is required to reduce job market liquidity. An unemployment figure of 4.3% is certainly no reason to panic. Quite to the contrary, most economies would happily consider this full employment, if not over-employment.
In this light, the early-August selloff seems to be much more based in fear than in fact. And it is exactly these emotions that we’d like to avoid. Check out our detailed article about recession indicators to learn more!
For what it’s worth, our Market Vane signal also turned bearish for August. It looks like impeccable timing, but there are multiple factors to this. For once, the signal’s economic component is stuck in bearish outlook for many months. That requires only one more indicator to turn bearish for the signal to trigger. In this case, it was the stock market momentum. Market Vane uses a mechanism that shortens the lookback period in times of elevated volatility, which is why it reacts more nervously than it usually would.
Overall, it might have been wiser to ride this out or at least wait a bit longer before exiting the market. But, of course, we don’t want to second guess our algorithms and stay with the tried and tested rules instead. What softens the blow though is that we are paid around 5% of interest while we are waiting on the sidelines.
As always, I want to thank everybody who reached out over the past month with questions, comments, and suggestions. It is an honor to have you on our site. If you like what we do, support our growth by sharing with your friends how TuringTrader adds value for your investing.
Stay tuned for further updates,
All the best
Felix
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Felix Bertram
Founder of TuringTrader.com