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A 32-year market vet shares 4 employment indicators that show the labor market is falling apart — and warns a recession will sink stocks by as much as 70%
By William Edwards,
6 hours ago
A trader at the New York Stock Exchange puts his hand on his face in September 2008.
Richard Drew/AP
The unemployment rate rose to 4.3% in July, triggering the Sahm Rule recession indicator.
But other labor market indicators show concerning trends as well.
Jon Wolfenbarger, founder of BullAndBearProfits.com, laid a few of them out in a recent note.
The labor market has been the talk of Wall Street over the last couple of weeks after the unemployment rate rose to 4.3% in July.
The upward move triggered the Sahm Rule recession indicator, which has a perfect track record since 1960 in identifying recessions in real time. It says that the US economy is already in a downturn when the three-month moving average of the unemployment rate increases by 0.5% from its 12-month trough.
Interestingly enough, the rule's creator herself, former Federal Reserve economist Claudia Sahm , does not think the economy is in recession. Nevertheless, the development spooked investors, at least temporarily, who are now keeping a close eye on what the jobs market does going forward.
For Jon Wolfenbarger, the recession indication from the Sahm Rule came as no surprise. The Portugal-based founder of investing newsletter BullAndBearProfits.com has been warning of a downturn for some time now amid worrying signals like an inverted Treasury yield curve, another recession indicator with a perfect track record going back several decades.
But the Sahm Rule isn't the only labor market indicator that should be worrying investors, Wolfenbarger said in an August 5 note. Others show alarming trends as well, according to the former JPMorgan and Merrill Lynch investment banker.
For instance, similar to the Sahm Rule in concept, the unemployment rate has risen by 0.9% from recent lows of 3.4%, crossing the two-year moving average. Historically, that has meant a recession.
BullAndBearProfits.com
There's also employment growth, or the rate of change in the number of employed people year-over-year. It's now at 0%, and most times when it has dipped negative, it has meant a recession, Wolfenbarger pointed out.
BullAndBearProfits.com/St. Louis Fed
The average weekly hours worked have also dropped to around 34.2. If that number falls further, it would be the third time in the last 20 years. The only other instances were the 2008 and 2020 recessions.
BullAndBearProfits.com/St. Louis Fed
Finally, according to ISM data, manufacturing employment is declining, which tends to track closely with overall employment. This could mean the surge in unemployment has more room to run, Wolfenbarger said.
BullAndBearProfits.com/Trahan Macro Research
A recession would mean big trouble for investors given how high stock valuations are, Wolfenbarger said in a call with Business Insider on Friday. He cited John Hussman's total market cap of nonfinancial stocks-to-gross value added valuation ratio, which hit all-time highs in July.
For the measure to return to levels where investors can expect long-term annualized returns of 10%, the S&P 500 would have to fall about 70% from current levels, Wolfenbarger said. Losses of at least 50% consistent with Hussman's measure also happened following the 1929, 2000, and 2008 crashes.
Hussman Funds
Wolfenbarger's views in context
While Wolfenbarger's outlook on stocks is well outside Wall Street consensus, his views on the direction of the US economy have moved more into the mainstream range of possible outcomes in recent weeks.
Investors will have their eyes on August's jobs and unemployment reports early next month — if the numbers are downbeat, the market could enter another selling period as it did in the days after July's jobs report.
But there are plenty of signs for optimism that the US economy can avoid a recession.
Some argue that July's jobs data was impacted by Hurricane Beryl in Louisiana and Texas. Labor participation is also picking up, which has helped fuel the rise in unemployment and is why Sahm thinks her indicator is producing a false positive. Inflation also fell below 3% year-over-year for the first time since 2021, giving the Fed added confidence to cut interest rates at its September meeting, which would aim to start providing a boost to demand in the economy again.
But it's a bit too early to tell. For the time being, investors have seemingly put their fears aside for now, with the S&P 500 inching back toward all-time highs.
If the labor market does continue to deteriorate, however, Wolfenbarger's stock market outlook — just like his warnings about the economy — could all of a sudden start to look more plausible in the months ahead.
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