What’s the Big Deal?

I’ve been a bit perplexed by the recent market decline….

Given I published an article last week titled Why the Small Cap Rally is Just Getting Started, you can safely assume that I did not see the market swoon coming.

But it happened.

Let’s step back to understand why the market has sold off so sharply. Afterall, there are some legitimate signs of economic weakness that materialized last week.

First, unemployment claims rose by 14,000 to 249,000 (for the week ending July 27) on Thursday

Second, we learned that the U.S. added 114,000 jobs in July, down from +179,000 in June, and the unemployment rate increased to 4.3% from 4.1% in June on Friday.

Yes, these two data points are both undeniable signs that that growth is slowing.

But let’s not get carried away. Unemployment is still just 4.3%.

Over the past 100 years or so, unemployment has been at 5% or higher and the economy has managed to chug along just fine.

Plus, GDP is growing (+2.8% in Q2 2024).

There aren’t any signs of systematic imbalances (that I can see!) in the economy.

And now the Fed has clearance to cut rates in September.

So why is the market freaking out?

As far as I can tell, it comes down to something called the Sahm Rule.

Here’s a WSJ article talking about it.

The Sahm rule suggests that a 0.50 percentage point increase in the unemployment rate (over a 12 month period) usually signals the start of a recession.

The Sahm rule was triggered on Friday.

Are we in a recession? I don’t think so!

  1. Payrolls are growing.
  2. Industrial production is growing.
  3. Real incomes are growing

Even Claudia Sahm herself says we are not in a recession.

But growth is definitely slowing, and the Fed has the undeniable evidence that it needs to cut rates.

When the Fed cuts rates in September, I have a hunch that stocks are going to be off to the races.

What am I doing?

Buying stocks.

I bought more Howard Hughes (HHH) this week

I got a little lucky on my timing as it looks like Bill Ackman is considering taking it private.

But the business looks cheap with the spin-off of Seaport complete and strong fundamentals.

Honestly, I think there are a ton of small cap stocks that look attractive.

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What do you think of the pull back?

Is it an opportunity? Or the start of a broader market decline?