Comparing the Sahm Indicator and the Yield Curve

In response to "Combining SMA10 and Sahm Indicator", a subscriber asked for a comparison of signals generated by the Sahm Recession Indicator (Sahm) and by yield curve inversion. The former signals a recession when the 3-month simple moving average (SMA) of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. The latter signals a recession when the yield on the 3-month U.S. Treasury bill (T-bill) rises above the yield on the 10-year U.S. Treasury note (T-note). To investigate, we calculate average monthly returns and standard deviations of monthly returns for the S&P 500 Index (SP500):

• When Sahm does not indicate a recession and, separately, when it does.
• When the yield curve does not indicate a recession and, separately, when it does.
• When SP500 is below its 10-month SMA (SMA10) and, separately, when it is above (for additional perspective).

Using end-of-month levels of SP500 since March 1959, Sahm levels since inception in December 1959 (history vintage 8/6/2021) and T-bill and T-note yields since December 1959, all through July 2021, we find that: