Sahm Rule Exceeds 0.5%: Preparing for an Economic Downturn

As of July 2024, the Sahm Rule indicator has surpassed the critical threshold of 0.5%, now standing at 0.53%. This development is significant as the Sahm Rule is highly regarded for its accuracy in predicting economic recessions. Historically, every time the Sahm Rule has exceeded 0.5%, a recession has followed, making it a nearly foolproof indicator.

The Sahm Rule has successfully predicted all U.S. recessions since the 1970s, which includes:
- 1974-1975 Recession
- 1980 Recession
- 1981-1982 Recession
- 1990-1991 Recession
- 2001 Recession
- 2007-2009 Great Recession
- 2020 Recession during the COVID-19 pandemic

The only notable near-false positive occurred in June 2003, shortly after the 2001 recession ended. However, this was a brief anomaly, and the Sahm Rule quickly returned to lower levels.

With the Sahm Rule exceeding 0.5%, a recession is highly likely within the next eight months, projecting a potential economic downturn around March 2025. Investors should take this time to reassess and adjust their portfolios to mitigate risks and leverage potential opportunities.

1. Defensive Stocks: Consider investing in companies that traditionally perform well during economic downturns, such as:
   - McDonald's (MCD)
   - Pfizer (PFE)
   - Johnson & Johnson (JNJ)

2. Long-term U.S. Treasury Bonds: Bonds typically perform well as interest rates drop during recessions. Key ETFs to consider include:
   - TLT (iShares 20+ Year Treasury Bond ETF)
   - TMF (Direxion Daily 20+ Year Treasury Bull 3x Shares)

3. Options for Hedging:
   - Buy SQQQ Calls: SQQQ is a triple inverse ETF for the QQQ. Purchasing call options on SQQQ can hedge against a market downturn.
   - Buy TQQQ Puts: Alternatively, buying put options on TQQQ (triple leveraged long QQQ) provides downside protection with less risk of decay during volatile or sideways markets.

The Sahm Rule's breach of the 0.5% threshold is a strong warning of a potential recession by early 2025. Investors should act now to safeguard their portfolios by investing in defensive stocks, increasing holdings in long-term U.S. Treasury bonds, and utilizing options to hedge against market declines. Preparing now can help mitigate risks and seize opportunities during the economic downturn.

This article aims to provide insights and strategies based on the latest economic indicators. Always consider your financial situation and consult with a financial advisor before making investment decisions.