"Sam's Rule" Dominates US Hot Searches! US Unemployment Rate Rises to 4.3%, "Recession Trading" Gaining Momentum

According to the latest information from Zhitong Finance and Economics APP, the US non-farm data for July shows a significant slowdown in the pace of US business recruitment, with the unemployment rate rising higher than expected to the highest level in nearly three years. This has finally triggered the "Sahm Rule" with an astonishingly accurate prediction of a 100% chance of an economic recession. The keyword "Sahm Rule" has completely dominated the top spot on US social media X, as well as on Facebook and Instagram, with much higher popularity than other topics including "AI" and "Nvidia's sharp decline". The latest release of non-farm employment data and unemployment rate, combined with previously announced extremely weak economic data such as the ISM US Manufacturing PMI, all indicate that the deterioration of the US economy is much faster than market expectations. This may lead the Federal Reserve to more firmly embark on a path of interest rate cuts in September, with traders starting to bet that the rate cut in September could be as high as 50 basis points, rather than the previously expected 25 basis points.

The latest non-farm data released by the US Bureau of Labor Statistics on Friday showed that the number of non-farm jobs in the previous month increased by 114,000 people (economists expected 175,000 people) after downward revisions to the statistics for the previous two months, making it one of the weakest data since the outbreak of the COVID-19 pandemic. The average hourly wage growth in July was also lower than the general expectations of economists. In addition, the non-farm employment figure for June was revised down from the previously announced 206,000 to 179,000.

More importantly, the US unemployment rate unexpectedly rose to 4.3%, exceeding economists' expectations of 4.1%, marking the fourth consecutive monthly increase.

The latest employment report has exacerbated the disappointing economic data of the past week, triggering concerns about a more rapid decline in the US economy leading to an economic recession. This has caused US and global stock markets to plummet, lowered US Treasury yields, indicating that market funds are flocking to Treasury bonds for safe-haven purposes. In addition, the price of gold has continued to hit historic highs due to safe-haven demand.

These economic figures may give Federal Reserve officials reason to believe that their monetary policy of the highest benchmark interest rates in over twenty years is excessively cooling the US labor market, rather than restoring it to the healthy growth trend before the pandemic.

As more and more Americans are unable to find jobs, the lack of strong income support means that US consumer spending is likely to enter negative growth territory. A decline in consumer spending will undoubtedly have a serious negative impact on the US economy, as 70%-80% of the components of US GDP are closely related to consumption.

After maintaining the benchmark rate at the highest level in twenty years on Wednesday, Federal Reserve Chairman Jerome Powell stated during a speech on Wednesday that policymakers may start lowering borrowing costs in September. Rate futures traders now believe that after the unexpected rise in the unemployment rate, there is a high probability of a 50 basis point rate cut at that meeting, rather than the previously widely expected 25 basis point cut **

Jerome Powell stated in his speech that as the inflation rate has dropped significantly from the peak of the epidemic, officials are now more focused on the other side of the dual mandate, which is to prevent undue damage to the U.S. labor market. In other words, the number of non-farm payrolls and the unemployment rate in the United States are currently the most important data for the Federal Reserve. Therefore, a weak U.S. labor market will undoubtedly prompt the Fed to start an interest rate cut cycle in September. Therefore, in the eyes of some analysts, the Fed's interest rate cut in September is only a matter of time before it is officially announced.

"Our inflation rate has indeed dropped significantly, and the unemployment rate has been at a low level," Powell said in his speech. "What we are constantly thinking about now is how to maintain this situation."

It is worth noting that the surge in the U.S. unemployment rate may be mainly due to more people losing their jobs and leaving the workforce, rather than an increasing number of new labor force entrants expecting to enter the labor market, triggering the "Sam Rule," which is undoubtedly bad news for the U.S. economy.

Furthermore, Hurricane Beryl also had a certain impact on the U.S. unemployment rate. It hit Texas on July 8th, and both non-farm surveys were conducted during that period, which may have contributed to the weak employment report. The U.S. Bureau of Labor Statistics stated that the number of people unemployed due to severe weather conditions did increase significantly.

In July, the labor force participation rate (the percentage of the population employed or actively seeking employment) rose slightly to 62.7%. The employment participation rate of workers aged 25-54 (also known as prime-age workers) further increased to 84%, the highest level since 2001.

Slowing job growth reflects layoffs in the IT and automotive manufacturing industries, as well as a reduction in temporary positions - which are often seen as a precursor to an economic recession. Meanwhile, the healthcare industry continues to lead in job growth.

Is the "Sam Rule" Finally Triggered? Is the U.S. "Economic Recession" Inevitable?

The core theory of the "Sam Rule" is that when the 3-month average of the unemployment rate is 0.5 percentage points higher than the 12-month low, it usually indicates that the economy is in a recession.

However, the latest data released on the evening of August 2nd showed that the U.S. unemployment rate in July rose by 0.2 percentage points from the previous month to 4.3%, exceeding the market's expectation of 4.1%. Economists had previously pointed out that even a 0.1 percentage point increase in the July unemployment rate would trigger the "Sam Rule," a leading indicator of economic recession with an accuracy rate of 100%.

According to the latest calculation of the unemployment rate, the unemployment rate in the United States has surged by 0.6% from its low point earlier this year. After months of consecutive unexpected increases in the unemployment rate, it has finally triggered the "Sam Rule" based on predicting a recession, which may indicate that the U.S. economy has begun to enter a recession.

The triggering of the economic recession indicator "Sam Rule" is like completely opening the Pandora's box of economic recession. Since the Federal Reserve economist Sam proposed the "Sam Rule", the accuracy of this indicator in predicting economic recessions has been 100%. In the 11 U.S. economic recessions since 1950, the "Sam Rule" has been confirmed in all cases. With the increasing number of initial and continuing unemployment claims, the market is increasingly concerned that the unemployment rate may trigger the "Sam Rule" in July or August, which largely means that the U.S. Federal Reserve officials' dream of a "soft landing" for the U.S. economy has been completely shattered.

Regarding the "Sam Rule", Federal Reserve Chairman Powell was also asked about it during a press conference on Wednesday Eastern Time. However, he seemed unconcerned at the time, referring to it as a "statistical regularity" and emphasizing that just as many recession leading indicators failed after the COVID-19 pandemic, this recession signal may not necessarily apply because he believes the U.S. job market remains strong and wage growth is showing a healthy slowdown.

"It looks like a normalized labor market, with job creation and wage levels both showing strong growth but gradually slowing down. If the situation goes beyond this range, then we are also prepared accordingly," Powell emphasized at the press conference.

In fact, as the creator of the "Sam Rule", Claudia Sam publicly called on the Federal Reserve to cut interest rates immediately in July during this Wednesday's Fed rate decision day.

Probability of a 50 basis point rate cut in September surges, "recession trades" may sweep the globe

As for Powell and the "Sam Rule" in predicting economic recessions, who is right and who is wrong? Perhaps only time will tell. But with the Sam Rule finally triggered, the expectation of a U.S. economic recession heating up has driven the probability of a 50 basis point rate cut in September to surge, and "recession trades" may further stir up huge waves in the global financial markets.

The continuous sharp decline in U.S. stocks this week is undoubtedly influenced by some very critical economic data, all of which are hinting that the U.S. economy may be heading into a recession, rather than the "soft landing" that Federal Reserve officials have been hoping for. These data include the recent surge in initial and continuing unemployment claims, weak ADP employment data, extremely low ISM manufacturing index, and the latest soft non-farm payroll numbers, coupled with the unexpected increase in the unemployment rate triggering the "Sam Rule".

Following the release of U.S. non-farm payroll data on Friday, the CME "FedWatch" tool shows that the probability of traders in interest rate futures markets expecting a 50 basis point rate cut by the Federal Reserve in September to boost expectations of a "soft landing" for the U.S. economy has surged. The "FedWatch" tool shows that the probability of a 50 basis point rate hike by the Fed in September is close to 60%, while the probability of a 50 basis point rate hike before the release of weak employment numbers and the unemployment rate was 0%

In the context of rising expectations of an economic downturn, the following sectors are generally considered to have relatively strong investment value. Since the release of some weak economic data in mid-July, these sectors have shown significant increases, especially traditional safe-haven sectors such as healthcare and gold-related sectors:

Consumer Staples: These essential products have relatively stable demand during economic downturns, including food, beverages, household goods, etc.

Healthcare: The healthcare sector usually outperforms the market during economic recessions due to its low correlation with the economic cycle.

Utilities: Utility companies provide basic services such as electricity, natural gas, and water, with relatively inelastic demand, making them defensive during economic uncertainties.

Precious Metals: Precious metals like gold tend to perform well during periods of economic uncertainty due to their traditional safe-haven properties.

High Dividend: Companies with stable free cash flow and high dividend yields can provide investors with relatively stable returns during market volatility.

In the U.S. stock market, the "Pacer US Cash Cows 100 ETF" (ticker symbol: COWZ) is considered one of the excellent investment choices for "recession trading." This ETF, which closely tracks mid-cap and large-cap stocks with high free cash flow, has attracted substantial inflows of funds for many years. The ETF's portfolio is heavily concentrated in companies that provide healthy and high free cash flow, presenting a "neutral style" in terms of industry allocation. Warren Buffett, known as the "Oracle of Omaha," has repeatedly mentioned that ample free cash flow in companies is one of his core stock selection principles.

The reason why COWZ has attracted the attention of many investors for a long time is mainly because it is a diversified ETF compared to sector-specific ETFs, with a focus on defensive assets with high cash flow, making it more suitable for the majority of risk-averse investors. During the almost year-long market crash in the U.S. stock market and even global stock markets in 2022, the performance of COWZ, which focuses on high cash flow, was remarkably strong. The ETF's price even saw a slight increase in 2022 when the S&P 500 index plummeted by 20%. For individual investors or institutions seeking a "barbell investment portfolio," COWZ, an ETF focused on high cash flow, is particularly attractive as it combines long-term growth with value investing