We love simple rules of thumb, but they can mislead us
The Sandbox Daily (6.22.2026)
Welcome, Sandbox friends.
Today’s Daily discusses:
three rules of thumb broken by the post-pandemic cycle
Let’s dig in.
Blake
Markets in review
EQUITIES: Russell 2000 +0.83% | Dow +0.29% | Nasdaq 100 -0.19% | S&P 500 -0.37%
FIXED INCOME: Barclays Agg Bond -0.27% | High Yield -0.09% | 2yr UST 4.232% | 10yr UST 4.943%
COMMODITIES: Brent Crude +0.58% to $77.89/barrel. Gold -0.85% to $4,209.7/oz.
BITCOIN: +2.47% to $64,161
US DOLLAR INDEX: +0.14% to 101.01
CBOE TOTAL PUT/CALL RATIO: 0.91
VIX: +2.98% to 17.28
Quote of the day
“One day or day one, you decide.”
- Paulo Coelho
We love simple rules of thumb, but they can mislead us
We spend our days immersed in data: identifying trends, digesting news, and studying past episodes.
Historically, many variables move together in predictable ways. Extrapolating these trends is one way to anticipate what lies ahead.
However, the pandemic cycle has broken a number of past relationships, making it more difficult than ever to identify turning points in the cycle.
The list of failed rules of thumb – also known as heuristics – includes:
Two quarters of decline define a downturn.
How do we determine when a recession has started? The answer, of course, is not straightforward because this is finance after all.
In practice, a recession requires a nuanced review of a wide band of economic data, determined in arrears by the National Bureau of Economic Research (NBER). More colloquially, recessions are characterized by two consecutive quarters of economic contraction, or negative GDP, which is the simple mark that Wall Street often applies.
The U.S. economy declined during the first two quarters of 2022. But despite widespread fears, no recession took root. Job gains continued, consumer demand sustained, and business investment stayed buoyant. The launch of ChatGPT on November 30, 2022 likely prevented a further economic downturn and lengthy bear market for stocks.
Details are important when analyzing economic growth. The decline in 1H2022 was driven by unusually large shifts in highly variable components: inventory accumulation and net trade. Both of those series were whipsawed by pandemic disruptions. Final private domestic demand, which includes only consumption and investment, has grown throughout the cycle.
When the yield curve inverts, the economy is in trouble.
We expect short-term yields to offer a lower return than long-term yields, reflecting the term premium required by investors to lock their money up for a longer time and account for a higher probability of default.
When this relationship inverts – as it did in the summer of 2022 – it can indicate that something is amiss.
While inversions have preceded most recessions, the curve gives us zero clues as to the timing, cause, or severity of the recession to follow.
The limitations of the yield curve inversion as a leading indicator have come under great scrutiny over the last few years as the economy and stock markets have prospered throughout.
Also, one major challenge in using the yield curve as a cycle indicator is identifying what aspects of the fixed income market are out of equilibrium. For example, if the short end falls because the Fed is lowering rates due to lower inflation, then the inversion can be corrected without a recession.
The “Sahm Rule” called every recession since WWII.
Economist Claudia Sahm sought a more timely way to diagnose the onset of a recession than waiting for NBER’s expert judgment.
The Sahm Rule states a recession is unfolding when the three-month moving average of the national unemployment rate rises by 0.5% or more from its prior-year low.
The Sahm rule officially triggered in July 2024. This occurred when the three-month moving average of the national unemployment rate rose to 4.3%, which was 0.53 percentage points above its 12-month low.
Fortunately for us, Claudia Sahm is still a practicing economist, offering real-time commentary.
She downplayed her own indicator throughout 2024 and 2025 due to a variety of factors: the absolute level of unemployment rate was rising from a 50-year low, unique post-pandemic factors like a burst in labor supply from increased immigration artificially created a false positive, and clarified the signal as a coincident marker and not a predictive rule.
Bottom line
We love simple rules of thumb because they help us make sense of a complex world. But when we treat them as immutable laws, they can lead us astray.
History remains one of our most valuable guides. But successful investors study the underlying forces driving past relationships rather than blindly extrapolating them into the future.
Many relationships have failed in this cycle. The pandemic introduced a series of extraordinary distortions – lockdowns, shortages, inflation, excess savings, revenge spending, supply chains, capital flows, etc. – that have led to a series of new patterns.
The mistake wasn’t that the indicators were “wrong,” but that investors elevated simple heuristics into laws of nature.
Context matters. History should be used as a guide, not gospel.
Markets reward those who remain curious enough to question old assumptions and flexible enough to adapt when conditions change.
Intellectual humility is what keeps us in the game.
Sources: National Bureau of Economic Research, St. Louis Fed, Bloomberg
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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Great piece. Context matters. That’s what we preach too.
We love to capitalize on market inefficiencies, and too-simple heuristics are often the cause of these inefficiencies!