Recession triggers panic! The best time to allocate safe haven ETFs
Last Friday, the non farm payroll data for July in the United States came as a surprise, with the unemployment rate reaching 4.3%, triggering two major recession indicators and triggering a sustained sell-off in the US stock market!
Especially semiconductor stocks. It’s like a river of blood flowing! Is it time to temporarily allocate safe haven ETFs for industries such as pharmaceuticals and public utilities that are rising?
The US economy triggers two major signs of recession
McKelvey’s Rule
An indicator proposed by economist McKelvey to predict whether an economy will decline based on changes in unemployment rate.
Simply put, when the unemployment rate rises by more than 0.5 percentage points, this rule considers the likelihood of an economic recession to be significantly increased.
When the unemployment rate rises, it indicates that it has become difficult to find a job, which is usually a signal that the economy is starting to decline.
When the unemployment rate triggers a rise of over 0.5 percentage points, economists and policy makers will closely monitor other economic indicators to assess the risk of economic recession.
Sahm rule
Proposed by economist Claudia Sahm, it is also a predictive indicator for economic recession.
This rule looks at the three-month moving average of the unemployment rate. If it is 0.5 percentage points higher than the lowest point in the past year, the Sahm rule considers that an economic recession has begun.
The rapid increase in unemployment rate means a significant weakening of economic activity, which can detect the arrival of economic recession earlier.
The US unemployment rate rose from 4.1% to 4.3% in July, which not only surprised the market but also exceeded economists’ expectations. Triggering the Sahm rule, a rise in unemployment usually means a slowdown in economic activity, and companies will reduce their employees to cope with reduced income or rising costs.
Compared to traditional indicators of economic recession, such as two consecutive quarters of negative GDP growth, the Sahm rule can more quickly capture early signs of economic downturn, thereby helping decision-makers take timely response measures.
The recent increase in unemployment rate may be the result of a combination of slowing economic growth, reduced inflationary pressures, and policy uncertainty.
There may be a risk of recession, mainly including three major impacts:
The possibility of policy adjustment is that the Federal Reserve may adopt a loose monetary policy, such as interest rate cuts, to alleviate pressure on the job market by stimulating economic growth.
In the market reaction, investors may be worried about the economic prospects, leading to increased volatility in the stock market, increased risk aversion, and capital flows to safe assets such as treasury bond and gold.
Adjusting corporate strategy, including cost cutting, delaying investment plans, and reducing recruitment, to further impact the job market.
By delving into these two rules, we can better analyze the current market situation, formulate corresponding strategies, and maintain stable investment performance in uncertain market environments.
Configuring safe haven ETFs is the current trend
Investor response strategies
Consider adjusting the investment portfolio and increasing the allocation of defensive assets, such as high rated bonds and defensive stocks (such as healthcare, utilities, etc.), to reduce the risks brought by market volatility.
Pay attention to economic data, especially employment, inflation data, and consumer confidence index, and adjust investment strategies and risk management measures in a timely manner.
Stay calm amidst fluctuations, avoid blindly following trends in investment, adhere to a long-term investment perspective, and seek high-quality assets with long-term growth potential.
The latest data on the US economy has triggered two major signs of recession – the Sahm rule and the continuous inversion of the yield curve.
Triggered market concerns about economic recession. Investors may consider allocating safe haven ETFs to protect their investment portfolios from potential economic downturns.
The inverted yield curve is another important recession indicator, as the US yield curve has been inverted for the past two years, meaning that short-term bond yields are higher than long-term bonds.
It means that the market’s expectations for future economic growth are weak, usually indicating the arrival of an economic recession. Recent data has further strengthened this signal.
Safe haven ETF category
Treasury bond ETFs: These ETFs invest in US treasury bond, providing stable returns and low risks. For example, iShares 20+Year Treasury Bond ETF (TLT) and Vanguard Total Bond Market ETF (BND) are common choices.
Gold ETF: Gold is often seen as a safe haven asset and performs well during times of economic uncertainty. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) are two popular gold ETFs.
Defensive stock ETFs: These ETFs invest in stocks in defensive industries such as utilities, consumer essentials, and healthcare. These industries typically perform well during economic downturns. The Vanguard Consumer Staples ETF (VDC) and Health Care Select Sector SPDR Fund (XLV) are examples of such ETFs.
Other defensive stock ETFs
Utilities Sector
Utilities Select Sector SPDR Fund (XLU): invests in large companies in the utility industry, including power, gas, and water companies.
Vanguard Utilities ETF (VPU): tracks the MSCI US Investable Market Utilities 25/50 index, covering a range of utility companies.
Consumer Staples Sector
Consumer Staples Select Sector SPDR Fund (XLP): invests in large companies in the consumer goods industry, such as food, beverage, and household goods companies.
Vanguard Consumer Staples ETF (VDC): tracks the MSCI US Investable Market Consumer Staples 25/50 Index, covering a range of consumer necessity companies.
Healthcare Sector
Health Care Select Sector SPDR Fund (XLV): invests in large companies in the healthcare industry, including pharmaceuticals, medical devices, and health insurance companies.
Vanguard Health Care ETF (VHT): tracks the MSCI US Investable Market Health Care 25/50 index, covering a range of healthcare companies.
Real Estate Sector
Vanguard Real Estate ETF (VNQ): invests in real estate investment trusts (REITs) in the United States, which own and manage real estate generated by revenue.
IShares U.S. Real Estate ETF (IYR): tracks the Dow Jones U.S. Real Estate Index, covering a wide range of real estate companies and REITs.
Telecommunications Sector
IShares U.S. Telecommunications ETF (IYZ): invests in companies in the U.S. telecommunications industry, including those providing telecommunications services.
SPDR S&P Telecom ETF (XTL): tracks the S&P Telecom Select Industry Index, covering a wide range of telecommunications companies.
Global defensive stock ETF
IShares Global Consumer Staples ETF (KXI): invests in stocks of global consumer necessity companies, covering both developed and emerging markets.
IShares Global Utilities ETF (JXI): invests in stocks of global utility companies, providing an internationally diversified investment portfolio.
High quality and high dividend stock ETF
Vanguard Dividend Appreciation ETF (VIG): invests in companies that have continuously increased dividends for many years, typically financially stable and able to perform well during economic downturns.
IShares Select Dividend ETF (DVY): tracks companies with high dividend yields, covering high-quality companies in some defensive industries.
Volatility ETFs: These ETFs aim to hedge market volatility by investing in volatility indices such as VIX. For example, ProShares VIX Short Term Futures ETF (VIXY) and iPath Series B S&P 500 VIX Short Term Futures ETN (VXX).
Defensive stock ETFs offer a diverse range of options, covering multiple industries and sectors. Investors can protect their investment portfolio during periods of economic uncertainty, reduce volatility risks, and maintain stable returns.
Given the emergence of two recession indicators, rising unemployment rates and inverted yield curves, market concerns about economic recession have intensified. In this case, investors can consider allocating safe haven ETFs to protect their investment portfolios from potential economic downturns.
Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investment carries risks, and caution is necessary when entering the market.
Leave a Reply