A reliable labor-market recession indicator has triggered - but this time it could be bullish for stocks

By Joseph Adinolfi

It's not the Sahm rule - it's the '10% recession rule'

A reliable recession indicator maintained by market strategists at Piper Sandler triggered last week - but the same strategists who developed the indicator believe that, in all likelihood, its triggering is bullish for stocks.

Michael Kantrowitz, chief market strategist at Piper Sandler, said in a report shared with MarketWatch on Tuesday that Friday's April employment report from the Labor Department had triggered his team's "10% recession rule."

Simply put, the rule triggers when the three-month moving average of the number of unemployed people in the U.S. workforce rises 10% compared with its level from one year ago. In the past, it has been a reliable indicator that a recession is coming.

However, this time around, Kantrowitz said that the rule's triggering is more likely a harbinger of what investors would likely interpret as a welcome slowdown for the U.S. economy, rather than a recession.

He characterized it as the latest indication that the U.S. labor market is shifting back toward its pre-pandemic norm. This is likely bullish for both stocks and bonds, as it would encourage the Federal Reserve to cut interest rates, Kantrowitz noted.

Such an interpretation is supported by investors' reaction to the April jobs data released Friday, which sent stocks sharply higher. The bullish reaction across markets has continued this week, with the S&P 500 SPX on track for its fourth straight session in the green.

On Tuesday, the S&P 500 was up 16 points, or 0.3%, at 5,197 in early-afternoon trade. The Nasdaq Composite COMP was up 35 points, or 0.2%, at 16,385, while the Dow Jones Industrial Average DJIA had gained 73 points, or 0.2%, to 38,925.

Stocks rallied in the wake of the jobs data's release as traders bet on a higher likelihood of multiple rate cuts before the end of 2024. Friday's report showed that the unemployment rate ticked higher to 3.9% last month, while the U.S. economy only created 175,000 new jobs, missing economists' expectations for more than 200,000 jobs.

The relatively cool job-creation numbers were supplemented by a slowdown in the pace of wage growth, which market strategists said could help tamp down inflation after progress appeared to have stalled earlier this year.

Economists closely monitor the labor market for signs of a slowing economy. The Sahm rule, named after former Fed economist Claudia Sahm, came closer to triggering in April based on the rise in the unemployment rate.

The Sahm rule - which is intended to offer an advance warning about a recession ahead of an official declaration by the National Bureau of Economic Research - is said to trigger once the three-month average of the unemployment rate rises 50 basis points or more relative to the lowest three-month moving-average level from the past year.

-Joseph Adinolfi

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05-07-24 1354ET

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