The Recession Is On

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The “Sahm Rule” activates… The Fed may have moved too slow (again)… What stocks do after a recessionary rate cut… The AI hardware kingslayer starts with a “T”… The latest Quantum Edge hotlist delivers a small-cap buy list… When you should consider smashing the “sell” button…

❖ A bona fide recession signal just hit…

On Friday, economists finally got to wipe some of the egg off their face.

For much of the past three years, their calls of “recession!” have been louder… then quieter… then louder again.

All the while, the recession itself continually failed to manifest. Consumer spending stayed robust, jobs held firm, and the market soared.

Eventually, inflation dropped to normal levels, too. Even the two quarters of negative GDP in the first half of 2022 – the traditional and most popular measure of recession – quickly reversed into further expansion.

But now a different, far more timely recession indicator has triggered. And unlike the GDP measure, it hasn’t flashed a false signal in over 60 years.

It’s called the Sahm Rule. Developed by economist Claudia Sahm, it measures the average rise in unemployment and its change from a year ago. If the three-month average unemployment rate rises by 0.5% from its lowest point over the last year, a recession is underway.

This rule helps us know we’re in recessions well before they’re “officially” shown by the GDP numbers. For example: with last month’s positive GDP readout, we’d need to wait at least two more quarters to know for sure.

The orange line in the chart below is the unemployment rate, while the blue line is a real-time readout of the Sahm Rule. The red line is the threshold for the Sahm Rule to trigger.

As you can see, we just crested the 0.5 threshold… and every time that’s happened since 1960, it’s been the beginning of a recession:

❖ It looks like the Federal Reserve has once again moved too slow…

What’s worse is the tumult over unemployment numbers came after the Fed held rates firm last week.

Many expected they would. But now, there’s palpable fear that, once again, the Fed has been too slow to react to changing economic conditions.

It first showed its hand when it believed, back in late 2021, that high inflation would be “transitory.” It took months – and a CPI reading more than double the historical average – before the Fed took the necessary measures to tame inflation.

Many assumed this would be a wake-up call for the Fed, which would more quickly react to slowing inflation in the future. The “soft landing” and “no landing” scenarios ran rampant, and it was hard not to agree when stocks and GDP kept surging higher.

One day of volatility has a funny way of changing things. Over the past week, the market has gone from pricing in just 25 basis points in cuts at the September FOMC meeting to now 50. Those odds (of a 50 basis-point cut) are up to 79.5%, up from 22% the day before.

(Funny enough, you might remember from our weekend conversation that Jason Bodner said the Fed should’ve cut at the last meeting. Bodner for Fed Chair, anyone?)

A 50-point cut could be the shot in the arm the market needs. Problem is, we now have to wait a month and a half to get it – unless the Fed puts up an emergency rate cut, which would probably just spook investors further.

And how long even that would be able to stave off a downtrend is unclear.

The Sahm Rule indicates we’re in recession. And as we shared from Trade Cycles editor William McCanless last week, recessionary rate cuts tend not to be bullish for the market.

Here’s that table from William once more…

As we’ve been telling you, the precautionary measures for a crash are simple in concept, but difficult in execution:

1. Raise cash… even if that means selling stocks at less-than-ideal prices.
2. Hold some gold and silver as wealth protection, stomaching the lack of price growth in exchange for lower volatility.
3. And be open-minded about short-term trading. When volatility gets this high, it offers plenty of opportunities to reap big rewards on quick moves.

❖ Turning over to tech, here’s an interesting tidbit on AI for you…

There was an overlooked announcement out of Apple last week…

For the past two years, Nvidia has dominated the AI narrative. That’s because Nvidia makes graphics processing units (GPUs), which have to date been the semiconductor type of choice for large language models like ChatGPT.

Apple, however, has announced an AI pursuit, Apple Intelligence, in which it’s opted not to use Nvidia’s GPUs – or anyone else’s, for that matter. Instead, Apple is using a unique type of semiconductor called a tensor processing unit (TPU), developed by Google.

Without getting too into the technical details, you can think of GPUs as being like a bulldozer. They use sheer power to solve problems, and they may not always be the most efficient choice. But with brute force, they get the job done.

What’s more, the way we use GPUs for AI right now is by stacking up racks and racks of them in datacenters, and then connecting that power to applications over the internet.

TPUs, on the other hand, are more specialized for a certain type of AI integration that’s extremely promising. It’s called “edge computing.” And it proposes to take all that GPU power that’s currently hosted in a datacenter and integrate it into the device itself.

If you were to demolish a building, using TPUs would be like carefully placing a number of detonation charges at key weak points – far less risky, expensive, and cumbersome than sending in a bulldozer.

By using TPUs, Apple will be able to create a multitude of AI applications that are more subtle than an AI chatbot, such as automatic translation and predictive text.

This is a significant pivot for the AI trade. All of a sudden, Nvidia’s GPUs may not be the go-to solution. And that means the tremendous premium NVDA has commanded could soon deteriorate further.

As for the companies best positioned for this trend, I’ve already named them. Apple was right to be a late mover on AI – it meant they could integrate it in a way that makes sense and is useful for their customers. And Google, being the company behind TPUs, is a no-brainer.

But also take a look at Qualcomm (QCOM), a leader in edge-computing devices. Its stock also happens to have taken the biggest hit of these three in July; QCOM is down more than 30% from its peak and lower than the Nasdaq 100 over the past three months.

Once the dust settles and volatility abates, QCOM may wind up being one of the best buys of the major semiconductor companies going forward.

It also boasts a Business Quality Score of 91 and a Strong Bullish 92 on the TradeSmith Ratings gauge, despite the recent decline – two noteworthy qualities.

❖ So long as stocks are dropping, let’s help you prep your buy list…

Every Monday here in TradeSmith Daily, we’ve taken to sharing the latest in Jason Bodner’s Quantum Edge Hotlist.

As I described on Saturday, it’s like getting an updated look at the ultimate watchlist of Wall Street’s biggest institutions every single week.

All the stocks that grace the top of the hotlist have strong fundamentals and evidence of huge buying volume by big money.

If it wasn’t evident from the last couple weeks’ lists, large caps are no longer in vogue. The Big Money is heavy into smaller-cap financial, agriculture, semiconductor, and biopharma stocks like Apollo Global (APO), Cal-Maine Foods (CALM), Alpha and Omega Semiconductor (AOSL), and Halozyme Therapeutics (HALO).

At the bottom of the list, we have to call out Beyond, Inc. (BYON), formerly known as Overstock.com, which has been a regular entry since mid-June… and the stock is down nearly 25% since then.

Jason’s subscribers get the latest version of this list every Monday afternoon. So, he’ll publish the newest list in a few short hours, along with his market analysis. Go here to learn all about our highest subscription level to Jason’s research: Quantum Edge Pro.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith

P.S. Before you run off to brave this week’s market action, an important note.

Porter Stansberry, CEO of our parent company MarketWise, is stepping forward to warn that in the markets, “We are playing a rigged game. And it is rigged because of the government.”

He recommends plenty of prudent moves to protect yourself as this trend plays out. One of them involves the most important tool in the TradeSmith arsenal… and how it could save you a ton of money and mental anguish if a bear market strikes.

Click here to watch Porter lay out all the evidence – and discuss the exact TradeSmith tool you can use to prepare for a wild ride in 2024 and beyond.