The US non-farm payrolls unexpectedly came in weak, which has caused global stock markets to fluctuate. The 'Sam Rule' once again became a market curse.

After the US non-farm payroll report for July was weaker than expected on Friday, global stock markets fell into a panic-like crash on Monday. The weak employment data triggered concerns about a sharp decline in the US economy and sinking into recession, which severely hit market risk appetite and sparked recessionary trading.

In a situation where risk aversion is rising, risky assets such as Bitcoin and global stock markets have been caught in a wave of sharp declines, while safe-haven assets such as US Treasury bonds have risen against the trend. In a situation where the market is turning to safe-haven, defensive sectors are expected to continue to benefit from speculation in recessionary trading.

Non-farm payrolls triggered recessionary trading and increased rate cut expectations.

The US non-farm payroll report unexpectedly came in weak on Friday. In July, non-farm payroll employment saw an increase of 114,000 people, lower than the expected 175,000 and the revised previous value of 179,000. The most noteworthy point is that the latest unemployment rate in the US rose to 4.3% against expectations, triggering the 'Sam Rule' again. That is, when the three-month moving average of the US unemployment rate rises by 0.5 percentage points or more from the low point of the past 12 months, it usually indicates that the US has entered the early stage of an economic recession.

At the same time, the unexpected drop in the ISM PMI released earlier last week also drove recessionary trading. In July, the US manufacturing PMI fell to 46.8, lower than the expected 49 and June's 48.5. In addition, weaker-than-expected growth in US June durable goods orders and wholesale inventories, as well as higher-than-expected initial jobless claims, all contributed to recession concerns.

After a series of weak US economic data releases, market expectations for a Fed rate cut also rose. After the data was released, the CME Fed observation tool showed that traders currently believe that the probability of a 50-basis-point rate cut by the Fed in September is 98.5%, far higher than the 31% before the data was released. Traders have fully priced in the expectation of at least a 25-basis-point rate cut in September and are currently expecting a cumulative 120 basis points of rate cuts before year-end.

Goldman Sachs also raised its US economic recession expectations on Monday, with the possibility of a US economic recession in the next year rising from 15% to 25%. Second, Goldman Sachs expects the Fed to cut rates by 25 basis points in September, November and December respectively. In addition, Goldman Sachs said that if its forecast was wrong and the August employment report was as weak as in July, then the probability of a 50 basis point rate cut in September would be high. By contrast, JPMorgan and Citigroup have adjusted their forecasts, expecting the Fed to cut rates by 50 basis points in September.

In addition, the massive selling by Buffett has intensified market concerns. The latest quarterly report shows that as of the end of the second quarter, Berkshire's holdings of Apple fell from 0.789 billion shares in the first quarter to about 0.4 billion shares, a decrease of nearly 50%. Since July, Berkshire has also cumulatively reduced its holdings of about 90 million shares of Bank of America, for a total of about 3.8 billion US dollars. Cathy Seifert, an analyst at CFRA Research commented that Buffett's massive selling may have been driven by recession worries, and that Berkshire is a 'company that prepares for a weak economic environment'.

Market speculation on recession boosts defensive sectors

In the context of significant recession trading characteristics in major asset classes, defensive sectors have seen good gains, such as the consumer staples sector, healthcare sector, and utilities sector. Since some weak economic data was released in mid-July, these sectors have shown clear signs of growth. Secondly, individual high-dividend-paying stocks that can provide safe-haven attributes have also attracted buyers. It is worth noting that, historically, the defensive sectors have achieved good gains during the Federal Reserve's recessionary interest rate cuts.

On Friday, with the collapse of the US stock market, the defensive consumer staples sector and utilities sector rose. In addition, the healthcare sector fell, but the decline was far less than that of the broader market.

Recently, driven by the AI boom, investors chasing large tech stocks have pushed their weight in the entire stock market to an extreme, surpassing the peak set during the dot-com bubble. On the other hand, the defensive sectors in investors' portfolios now account for the smallest share in recorded history.

However, a recent survey of fund managers by Bank of America shows that investors increased their holdings of utilities stocks for the first time since February 2009, raising the proportion of defensive stocks by 20 percentage points on a month-on-month basis. This is the largest monthly increase on record. And history shows that the reversal of such extreme situations may be more violent than most investors expect at the beginning, and then last longer.

History also shows that if the rotation trade continues, they may continue to benefit. Deutsche Bank analyst Jim Reid recalled in a client report earlier that recent trading behavior reminded him of the period after the dot-com bubble peaked. Technology stocks plummeted, but defensive stocks such as consumer staples, utilities, and healthcare rose. He said: "A large amount of money has shifted to defensive stocks such as consumer staples, utilities, and healthcare. In the nine months after the bubble burst, they rose 35% to 45%, while technology stocks fell more than 50% during the same period."

Given the scale of capital huddling among technology giants that makes many other industries pale, even if funds are moderately transferred out of tech-related industries such as information technology and non-essential consumer goods and communications services, they may bring tremendous returns to other industries in the market.

In the recent round of pullback, these three sectors have also outperformed the broader market. Among them, the S&P utilities sector ETF has risen nearly 2% this month, while the three major US stock indexes have all fallen more than 2%. Secondly, the S&P consumer staples sector ETF and healthcare sector ETF have positive returns so far this month, and their 60-day gains are better than those of the three major indexes.

Utilities

Utility companies provide basic services such as electricity, natural gas, and water, with small demand elasticity, so they have a certain degree of defensiveness in times of economic uncertainty. According to Morningstar's data, almost all utility companies are expected to have annual profit growth of at least 6%. The industry's 3.6% yield is historically competitive with interest rates.

Amid the backdrop of the benchmark interest rates expected to decline in the US, dividend payouts from utilities companies continue to increase. As of mid-June, the dividend yield discount had narrowed to just 70 basis points, consistent with historical yields prior to 2008. Furthermore, the dividend yields from utilities combined with growth investment opportunities in renewable energy, AI datacenters, and power grid infrastructure make these stocks more attractive in terms of risk-return rate.

The utilities sector provides investment exposure to a large number of blue-chip utility companies with strong balance sheets such as: American Southern Company (SO.US), American Electric Power (AEP.US), Dominion Resources (D.US)...$Southern (SO.US)$,$Duke Energy (DUK.US)$,$Sempra Energy (SRE.US)$,$American Electric Power (AEP.US)$The victim of the concentrated rise is diversification. Bonds as an asset class are still underperforming this year. Relevant index tracking raw materials only rose 3%. According to analysis, only 23% of equity ETFs can outperform the S&P 500. Strategies that pursue performance, such as actively managed ETFs, quantitative-based intelligent$Dominion Resources (D.US)$.

Consumer staples.

Consumer staples tend to have relatively stable demand in periods of economic downturn, including food, beverage, and household items. Everyday items are often less affected by sales during times of both economic prosperity and downturn, and these companies typically have strong resistance to recession. With economic cracks appearing, the sector may provide strong relative performance in the future. Moreover, the consumer packaged goods industry is expected to reach $18.94 trillion by 2031, at a compound annual growth rate of 5.1%.

In last week's earnings reports, seven out of eleven consumer staples companies had profits that exceeded expectations. In terms of revenue, only two companies exceeded expectations, one company met expectations, and the rest fell behind expectations. Among consumer goods companies that reported this quarter's earnings, nearly 70% of them exceeded profits expectations. In terms of revenue, 65% of companies were below expectations.

In consumer staples, retailers with lower-priced private brands often have more pricing power due to the sticky demand, and thus have a stronger fundamental basis. Furthermore, these enterprises will try to reduce costs and change prices and packaging to alleviate the looming profit decline. For example, two beverage giants, Coca-Cola (KO.US) and PepsiCo, have been raising prices for more than two years, but sales have continued to increase steadily. Personal care product manufacturer Unilever (UL.US) exceeded second-quarter sales expectations in the face of a price increase, and the guidance for annual operating profit margins was higher than expected; another personal care industry giant, Colgate-Palmolive (CL.US), achieved volume and price increases in the second quarter by relying on strong demand, and the company revised upward the full-year organic sales growth and profit guidance as a result.

For example, two beverage giants...coca-cola (KO.US) with$PepsiCo (PEP.US)$...while personal care product manufacturers...$Unilever (UL.US)$...while another personal care industry giant...$Colgate-Palmolive (CL.US)$...also achieved higher sales and profit guidance due to strong demand in the second quarter, resulting in rising organic sales for the whole year.

In addition, as spending was squeezed, consumers prioritized the purchase of necessities rather than bulk non-essential items, benefiting essential retailers selling food and groceries such as...$Walmart (WMT.US)$with$Costco (COST.US)$...non-essential consumer goods manufacturers performed weakly.$Target (TGT.US)$with$Home Depot (HD.US)$Companies with stable free cash flow and high dividend yields usually provide relatively stable returns for investors during market volatility. For example, in the US stock market, the "Pacer US Cash Cows 100 ETF" is one of the best investment options for "recession trades". This ETF, which closely tracks middle and large-cap ETF trading of high free cash flow, has attracted huge inflows for many years.

The medical care sector usually outperforms the overall market during economic downturns due to its low correlation with economic cycles. For example, in the global economic recession of 2009, the pharmaceutical and biotechnology industries had steady performance and limited impact on sales and profits.

The latest earnings season also showed stable performance of companies in the sector. Last week, 21 medical care industry companies announced quarterly earnings, and 19 of them exceeded earnings expectations. In terms of revenue, five companies had lower than expected revenue while the rest exceeded expectations. Among the constituents of the S&P 500 Medical Care Index, 88% of the companies have exceeded profit expectations and 78% have exceeded revenue expectations thus far. The medical care industry is still one of the industries with the highest EPS growth among other industries.

The demand for medical care is very inelastic. Despite the many external variables, demand for medical care products and services remains very strong. The design of medical insurance systems makes payments have non-selectivity and regularity, further consolidating the inelasticity of demand, which is not an expenditure that most consumers can easily give up during a cash crunch.

Demand for medical care has been increasing in the past few years, especially with the accelerated wave of global aging. The fact is that as people age, most of them need more medical care. For example, the US Department of Health and Human Services predicts that the country's medical spending will almost double by 2050.

In recent years, there has been an increase in demand for medical care, especially with the accelerating global aging trend. As people age, most require more medical attention. For example, the Department of Health and Human Services in the USA predicts that by 2050, medical expenditures in the USA will nearly double.

Therefore, the demand for medical care remains relatively stable regardless of the economic situation. In addition, the gross margin of most bio-pharmaceutical drugs is high - many drug companies promote potential drug gross margins of over 95%, which reduces the impact of inflation. Analysts believe that regardless of macroeconomic factors, healthcare stocks will perform better when the market appreciates the stable driving factors of the industry. Moreover, the more critical factor is that after the interest rate trend becomes loose, the cost of capital decreases, and the capital expenditures of the medical industry will increase investment.

In addition, the dividend yield of the S&P Healthcare Select industry ETF is at the market average level, but its overall volatility is lower according to the fund's one-year beta coefficient and standard deviation. This is a good sign for investors - the fund is more stable and has a smaller decline in the market downturn.

High dividend-paying companies that have stable free cash flow and higher dividend yields can usually provide relatively stable returns for investors during market fluctuations. For example, in the US stock market, an ETF called the Pacer US Cash Cows 100 ETF (stock code: COWZ) is one of the excellent investment choices for "recession trading". This ETF, which closely tracks the transactions of mid- and large-cap stocks with high free cash flow, has attracted huge inflows of funds for many years. The fund's portfolio is fully concentrated on companies that provide healthy and high cash flow, with a "neutral style" in terms of industry allocation. Warren Buffett, who has the title of "stock god", has repeatedly talked about the ample free cash flow of companies as one of the core stock selection principles he has adhered to for a long time.

The positions of this ETF are fully concentrated on companies that provide healthy and high free cash flow. In terms of industry allocation, it presents a "neutral style". Warren Buffett, who is known as the "Stock God", has repeatedly talked about the company's abundant free cash flow as one of the core stock selection principles he has adhered to for a long time.$Pacer Us Cash Cows 100 Etf (COWZ.US)$Since stock buybacks usually do not trigger taxable events for investors, compared to strictly high-yielding ETFs, this fund can be considered more tax-efficient. This method of return can also help investors to get through major market downturns. The total assets managed by the fund have now grown to $1.22 billion.

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.

The Pacer US Cash Cows 100 ETF and Cambria ETF Trust Shareholder Yield ETF are excellent investment choices for recession trades.$Cambria Etf Trust Shareholder Yield Etf (SYLD.US)$According to the issuer, SYLD focuses on returning cash to shareholders through three operations: dividends, buybacks and net debt reduction.

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