Often I think markets either are mad or they make you mad. Or they are mad because they make you mad. Or they make you mad so they are more mad than they should be.
Stock markets around the world have dropped by propitious amounts over the weekend and today because of something called the Sahm Rule. But here is the mad part: even the originator of the rule, economist Claudia Sahm, is not really sure if it applies entirely in this case. Although she does say that directionally, it’s telling us what it should be telling us.
And please, don’t think I’m an expert in this other than the fact that I have read about it. But as I understand it, Sahm observed that almost without fail, the initial phase of a recession starts when the three-month moving average of the US unemployment rate is at least half a percentage point higher than the 12-month low.
advertisementDon’t want to see this? Remove adsThe great thing about the rule is that it’s simple, works like clockwork (although there have been times when it got close and didn’t go further) and that it kicks in early in the cycle. But because this is economics we are talking about, the problem with the rule is that it’s simple (nothing is really that simple) and that it’s an early-cycle indicator (early is good, but very sensitive to…
