Little-known rule triggered across US ‘predicts recession without fail’ as Costco & Walmart suffer Wall Street bloodbath

AMERICA'S favorite retailers were thrown into chaos as Wall Street experienced its worst day in two years, with major players like Walmart and Costco witnessing dramatic stock declines.

In the middle of this turmoil, investors are increasingly turning to one of the most reliable indicators to gauge whether a recession is imminent: the Sahm Rule.

The Sahm Rule, introduced by economist Claudia Sahm in 2019, states "without fail" that the initial phase of a recession begins when the three-month moving average of the US unemployment rate exceeds the 12-month low by at least half a percentage point, CNBC reports.

The metric has historically provided insight into economic downturns, and its relevance is heightened in light of recent economic data.

The latest weaker-than-expected jobs report for July has officially triggered the Sahm Rule, intensifying fears that the Federal Reserve may be falling behind in its efforts to manage the economy.

'WE ARE NOT IN A RECESSION'

However, Sahm herself remains cautious about drawing definitive conclusions from the rule.

In an email to CNBC, she noted, “We are not in a recession now — contrary to the historical signal from the Sahm rule — but the momentum is in that direction.”

While Sahm acknowledges the slowdown in economic growth, she points to resilient US consumer spending, stable production data, and household income levels as signs that the economy has not yet contracted, per the outlet.

She emphasized the importance of monitoring the economic trajectory closely, stating that the current situation requires careful management to prevent further decline.

As market volatility continues, Dario Perkins, managing director of global macro at TS Lombard, highlights the Sahm Rule's limitations to the outlet.

While it offers valuable insights, Perkins cautions against relying solely on one metric.

He argues that an uptick in the unemployment rate could signal a more substantial economic downturn, necessitating a broader analysis of various indicators and their interconnectedness.

With the Federal Reserve recently holding interest rates steady, there is speculation about potential rate cuts in the coming months.

TAKING ADVANTAGE

Sahm expressed concern that the Fed's decision to delay cuts might risk pushing the economy into contraction.

We are not in a recession now — contrary to the historical signal from the Sahm rule — but the momentum is in that direction.

“The Fed has a big lever still to pull,” she said, emphasizing the need for a proactive approach to alleviate economic pressure.

As the market grapples with these challenges, the Sahm Rule serves as a critical tool for investors and policymakers alike.

However, experts caution that understanding the full economic picture requires looking beyond a single indicator.

With growing uncertainty in the markets, the coming months will be crucial in determining whether the US economy can navigate these turbulent waters without succumbing to a recession.

THE DROPS

A sudden and violent shift in the global markets has erased a staggering $6.5 trillion, leaving traders on edge as they grapple with what many are calling the "Great Unwind," per Bloomberg.

This turmoil follows the worst day on Wall Street in two years, where the Dow Jones Industrial Average plummeted by more than 1,000 points — an alarming drop typically associated with intense economic fear and anxiety.

The Fed has a big lever still to pull.

As markets climbed slightly during Tuesday morning trading, a fragile calm settled over the financial landscape.

However, this steadiness is far from guaranteed, especially considering August's reputation for wild swings in capital markets, the Intelligencer reports.

This summer’s fluctuations were exacerbated by Japan’s largest market crash since Black Monday in 1987, sending shockwaves throughout global markets.

Warning signs had been flashing in the week leading up to the crash.

Notably, Warren Buffett announced he had cut his stake in Apple by about half and sold off additional shares of Bank of America, one of the nation’s largest banks deemed "too big to fail," per the above outlet.

These moves signaled cracks in the intricate web of global finance, where cheap foreign money has traditionally bolstered strong domestic companies.

As investors assessed the aftermath of the crash, a consensus began to form: while the economy is experiencing turbulence, it is not yet in free fall.

Unlike the conditions leading to the economic collapses of March 2020 or the Great Financial Crisis of 2008, there appears to be no single bank or hedge fund facing severe troubles.

Instead, the current downturn seems to be driven by a simultaneous unwinding of trades by large investors who borrowed in Japanese yen to invest in US stocks and other significant global assets.

The consequences of this market upheaval are substantial.

On Monday alone, more than $1 trillion was wiped out from the seven largest US companies, while cryptocurrencies — often seen as a barometer of risk appetite — plummeted to levels not seen since winter, per the Intelligencer.

This erosion of wealth could have far-reaching effects as banks and hedge funds reassess their solvency amid this unwinding.

The implications for the broader economy are becoming clearer.

The likelihood of a recession has dramatically increased, as indicated by analyses from Goldman Sachs and other economists.