Zhitong Finance and Economics APP learned that the non-farm data for July showed a significant slowdown in the recruitment of US businesses and an unexpected increase in the unemployment rate to its highest level in nearly three years, finally triggering the 'Sahm rule,' which has an astonishing 100% accuracy rate in predicting economic downturns. The keyword 'Sahm Rule' has completely dominated the X of US social media, as well as the hottest topics on Facebook and Instagram, with popularity far surpassing other topics, including 'AI' and 'Nvidia Crash'. The latest non-farm employment data and unemployment rate, as well as previously released extremely weak economic data such as the ISM U.S. manufacturing PMI, all indicate that the pace of deterioration in the U.S. economy is much faster than expected by the market, which may make the Federal Reserve more determined to embark on a path of interest rate cuts in September. Traders are now betting that the magnitude of the rate cut in September could reach 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 indicated that the number of non-farm jobs increased by 0.114 million people last month (economists expected 0.175 million), which is also one of the weakest data since the outbreak of the new crown epidemic, and the average hourly earnings growth rate for July was lower than economists generally expected. Among them, the non-farm employment in June was revised downward from the previously announced 0.206 million to 0.179 million.

More importantly, the U.S. unemployment rate unexpectedly climbed to 4.3%, surpassing economists' expectations of 4.1%, for the fourth consecutive month of upward movement.

The latest employment report has exacerbated disappointing economic data in the past week, which has sparked concerns that the U.S. economy will decline more sharply to the point of falling into an economic recession, causing the U.S. stock market as well as global stock markets to plummet, and pushing down U.S. Treasury yields, indicating that market funds are rushing to enter the safety of Treasury bonds, and the price of gold also continued to hit historic highs due to safe-haven demand.

These economic figures may give Federal Reserve officials a reason to believe that their monetary policy of the highest benchmark interest rate in more than 20 years is overly cooling the U.S. labor market, rather than restoring healthy growth before the epidemic.

As more and more Americans can't find jobs, the situation of negative growth in U.S. consumer spending is about to occur without strong income support, and the decline in U.S. consumer spending will undoubtedly have a serious negative impact on the U.S. economy, as 70-80% of the items in the U.S. GDP are closely related to consumption.

After the Federal Reserve maintained its benchmark interest rate at the highest level in 20 years on Wednesday, Federal Reserve Chairman Jerome Powell said in a speech on Wednesday that policymakers may begin to lower 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 rate cut of 50 basis points at that meeting, rather than the previously widely expected 25 basis points.

Powell said in his speech that since the inflation rate has fallen sharply from its peak, officials are now more concerned about the other side of the dual mandate, namely that the Federal Reserve hopes to prevent undue harm to the U.S. labor market. That is to say, non-farm employment and unemployment rates in the United States are the data that the Federal Reserve is currently most concerned about, so the weak U.S. labor market will undoubtedly push the Federal Reserve to start a rate cut cycle in September, so in the opinion of some analysts, the Federal Reserve rate cut in September is only one step away from being officially announced.

"Our inflation rate has indeed fallen sharply, and the unemployment rate has remained at a low level," Powell said in his speech. "What we are thinking about now is how we can maintain this state."

It should be noted 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 more new labor force groups expecting to enter the labor market, triggering the 'Sahm Rule,' which is undoubtedly bad news for the U.S. economy.

In addition, Hurricane Berelir also had a certain degree of impact on the U.S. unemployment rate. It attacked Texas, USA on July 8, and both non-farm surveys were in that period, which may have pushed the weak employment report. The U.S. Bureau of Labor Statistics said that the number of people who lost their jobs due to bad weather has indeed increased significantly.

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

The slowdown in employment growth reflects the wave of layoffs in the IT and automotive manufacturing industries, as well as a reduction in temporary positions, which is also usually regarded as a precursor to an economic recession. Meanwhile, the medical care industry continued to lead in employment growth.

Has the 'Sam rule' finally been triggered? Is the US 'economic recession' inevitable?

The core theory of the 'Sahm Rule' is that when the three-month moving average of the unemployment rate is 0.5 percentage points higher than the low point in the past 12 months, it usually means that the economy is in a recession.

However, the latest data released on the evening of August 2 showed that the US unemployment rate in July rose by 0.2 percentage points to 4.3%, exceeding market expectations of 4.1%. Economists had already 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 that is 100% accurate.

According to the latest unemployment rate, the US unemployment rate has skyrocketed by 0.6% from its low point this year. After several months of continuous and unexpected increases in the unemployment rate, the "Sam Rule," which predicts a recession based on the unemployment rate, has finally been triggered. This may mean that the US economy has begun to enter a recession.

The 'Sam Rule,' an indicator for economic recession, has been triggered, as if opening the Pandora's box of economic recession completely. Since economist Sam proposed the 'Sam Rule,' the accuracy of this indicator in predicting economic recession has been 100%, and it has been confirmed in all 11 economic recessions in the United States since 1950. As both the initial claims for unemployment insurance and continuing claims are increasing, the market is increasingly concerned that the unemployment rate may trigger the 'Sam Rule' for the remaining time this year, even in July or August. This largely means that the dream of a 'soft landing' for the US economy that Federal Reserve officials had been envisioning has been completely shattered.

Regarding the "Sam Rule," Federal Reserve Chairman Powell was previously asked about the issue at a press conference on Wednesday. However, he seemed indifferent at the time, calling it a "statistical pattern" and emphasizing that, just as many recession leading indicators were ineffective after the COVID-19 pandemic, this recession signal is not necessarily applicable because he believes the US job market is still strong and wage growth is showing a healthy slowdown in pace.

"It looks like a normalizing labor market, job creation and wage levels are both growing strongly but gradually slowing. If the situation goes beyond this range, then we are also prepared for it," Powell emphasized at the press conference at the time.

In fact, as the creator of the "Sam Rule" and an economic recession leading predictor, Ladia Sam publicly called on the Federal Reserve to cut interest rates immediately in July on Wednesday, the day of the Federal Reserve's rate decision.

The probability of a 50 basis point rate cut in September surged amidst increased recession expectations and 'recession trades' may be spreading throughout global financial markets.

As for Powell and the "Sam Rule" leading predictor for economic recession, who is right and who is wrong? Perhaps only time can give an answer. However, with the "Sam Rule" finally triggered, the expectation of a US economic recession heating up has led to a surge in the probability of a 50 basis point rate cut in September by the Federal Reserve to support a 'soft landing' of the US economy, and 'recession trades' may further create huge waves in global financial markets.

The continued plunge of the US stock market this week was undoubtedly influenced by some very critical economic data implying that the US economy may be heading for a recession, rather than the 'soft landing' that Federal Reserve officials have been envisioning. This data includes the recent surge in initial and continued claims for unemployment benefits, weak ADP employment data, an extremely low ISM manufacturing index, and the latest weak non-farm employment figures, as well as the unexpected growth of the unemployment rate that triggered the "Sam Rule."

Following the release of the US non-farm employment data on Friday, CME's "Federal Reserve Watch" tool showed that the probability of interest rate futures traders for a 50 basis point rate cut by the Federal Reserve in September to help support a 'soft landing' of the US economy surged. The 'Federal Reserve Watch' showed that the probability of a 50 basis point rate hike in September is now close to 60%, while the probability of a 50 basis point rate hike before the publication of weak non-farm employment figures and unexpected growth in the unemployment rate is 0.

In the case of increased economic recession expectations, several sectors are usually considered to have relatively strong investment value, and these sectors have shown a clear upward trend since some weak economic data was released in mid-July, especially the traditional safe-haven sectors of medical care and gold-related sectors:

Necessary consumer goods: these basic products are relatively stable in terms of demand during economic downturns, including food, beverages, household goods, etc.

Medical care: due to its relatively low correlation with economic cycles, the stock prices of medical care companies usually outperform the broader market during economic downturns.

Utilities: utility companies provide basic services such as electricity, natural gas, and water, with relatively inelastic demand. Therefore, they have a certain level of defensive capabilities in times of economic uncertainty.

Precious metals: Precious metals such as 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 higher dividend yields usually provide relatively stable returns for investors during market fluctuations.

In the US stock market, the ETF named "Pacer US Cash Cows 100 ETF" (stock code: COWZ) is one of the best investment choices for 'recession trades.' This ETF, which closely tracks mid-cap and large-cap stocks with high free cash flow, has attracted huge inflows of funds in exchange-traded funds (ETFs) for years. The portfolio of this ETF is concentrated in companies that provide healthy and high cash flow, presenting a 'neutral style' in industry allocation. Warren Buffett, known as the 'Stock God,' has repeatedly talked about the abundant free cash flow of companies as one of his core stock selection criteria in the long run.

The reason why COWZ has attracted many investors' attention for a long time is mainly because it belongs to a comprehensive type of ETF. Compared with industry ETFs, its holdings are more diversified and its focus is on high-cash-flow defensive symbols, which is more suitable for most investors who dislike market risks. During the almost full-year stock market crash in the US and even globally in 2022, COWZ, focusing on high-cash-flow, performed strongly and even achieved a slight increase in price in 2022 when the S&P 500 index plummeted by 20%. For individual investors or institutions seeking a "barbell investment portfolio", COWZ, which focuses on high cash flow, is particularly attractive because it combines long-term growth and value investment.