lose their jobs, they spend less. When unemployment rises rapidly and a lot of people lose their jobs, the economy feels the pain... just like it did in 2009. In fact, using a formula called the “Sahm Recession Indicator,” rising unemployment has predicted the last seven recessions. And it’s a formula you can easily calculate and verify on your own. If unemployment is at least 0.50 percentage points above its most recent 12-month low, then the economy is already in a recession. So, where are we now? Using the most recent employment data from July 2019, the current Sahm Indicator is 0.03 percentage points... Well below the 0.50 threshold. And the high-yield (or “junk”) bond market isn’t signaling trouble either. While both junk-bond yields and spreads have been moving higher, they remain historically low... well below levels that have indicated serious problems in the past. Even if we accept the yield curve’s historical accuracy (and ignore the accuracy of the Sahm Indicator) we still have a good year or more before we slide into a recession. That doesn’t mean we can’t see further market weakness in the near term... We could easily experience another sharp correction like the one last fall, even after all the volatility we saw this week. Either way, don't panic. The market will correct itself. And although the case for holding cash and gold is stronger than ever, we don't expect a recession any time soon.
And if we assume this inversion isn’t an anomaly, here’s what to expect... Within the next year or so, the S&P 500 will peak and then plummet. About six months after that... recession. It’s not a detailed timeline, but if we see a bear market in the next 10-12 months, a recession is almost inevitable. As interest rates fall, investors tend to move away from assets denominated in U.S. dollars – like U.S. Treasury bonds – and seek out safe-haven assets like gold. Case in point: After stubbornly trading sideways for three years, gold went on a tear and finally topped $1,400 per ounce for the first time in six years. After a surge like that, it’s not surprising that gold took a breather... even in the best of times, precious metals are volatile. They don’t rise in a straight line forever. It turns out, that breather was short-lived. As we go to press, gold is more than $1,500 per ounce. Now that we’ve left you clutching your portfolio prospectus, here’s some good news... One of the strongest leading indicators of a future recession is something we haven’t seen in about a decade... rising unemployment. Since 2009, we’ve seen unemployment fall from over 10% to hovering around 3.6% this month. While some analysts argue that a “false positive” yield curve is possible, you can’t fake unemployment. When people Shelter from the storm... A silver lining...
American Consequences
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