Combining SMA10 and Sahm Indicator

A subscriber asked about a stock market timing strategy that combines the market 10-month simple moving average (SMA10) and the Sahm Recession Indicator (Sahm), which signals the start of a recession when the 3-month SMA of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. Specifically, the strategy:

• Holds the S&P 500 Index (SP500) unless it is below its SMA10 and Sahm first signals a recession.
• Subsequently holds cash until SP500 crosses above its SMA10.

To investigate, we compare three alternative strategies:

1. SP500 – buy and hold the index.
2. SMA10 – hold the index only while it is above its SMA10 and otherwise hold cash.
3. SMA10+Sahm – combined signals as specified above.

We focus on average monthly return, standard deviation of monthly returns, monthly reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using end-of-month levels of SP500 since March 1959, Shiller’s monthly SP500 dividends (to estimate SP500 total returns) since January 1960, Sahm since inception in December 1959 (history vintage 8/6/2021) and T-bill yield since December 1959, all through July 2021, we find that:

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