ETF of the week: SCHD and the Sahm Rule opportunity

The Schwab US Dividend Equity ETF (SCHD) has suffered a harsh reversal after soaring to a record high of $83.15 last week. It has slumped by over 2.85% from that point and the trend will likely continue now that global stocks are slumping.

Futures tied to the Dow Jones slumped by over 325 points while those linked to the S&P 500 and Nasdaq 100 indices fell by 2.30% and 4.65%, respectively. Small cap stocks are also tumbling, with the Russell 2000 index falling by over 4%. 

The Nikkei 225 index tumbled by over 14% while the Hang Seng index crumbled by more than 2%. 

S&P 500 vs S&P 500 vs Dow Jones vs Nikkei 225

Unwinding of the Japanese yen carry trade

The SCHD, QQQ, VOO, and SPY ETFs are crashing because of three main reasons. First, there are geopolitical risks as Iran prepares to attack Israel and as Israel hints that it could attack Lebanon. 

Most geopolitical analysts believe that Israel will launch an attack after the recent Benjamin Netanyahu visit to the United States. He believes that the US will continue supporting the country in his fight. 

Second, as I wrote earlier on, the ETFs are crumbling as investors unwind a long-standing carry trade that has existed in the past few decades. The carry trade has let people borrow the Japanese yen at low rates and then invest in higher-yielding US stocks and bonds.

Now, the Bank of Japan and the Federal Reserve are moving in the opposite direction. The BoJ has started hiking interest rates while the Fed is expected to start cutting rates as soon as in its September meeting since the labor market is falling. 

Third, stocks are falling after Warren Buffett confirmed that he was selling Apple shares even as the stock soared to a record high. One of the best investors has now accumulated over $277 billion in cash, which is a sign that he is concerned about the economy and the stock market. 

Sahm Rule could be an opportunity for SCHD ETF

Still, historically, such big deep dives in the stock market have proved to be ideal opportunities to buy the dip. For example, investors who bought the fear when the SCHD ETF crashed to $33.26 in March 2020 have benefited as it has soared to over $83.15. 

There are a few catalysts that could push the Schwab US Dividend Equity ETF higher in the coming weeks. First, there is the concept of the Sahm rule, which has accurately predicted recessions for many years. 

The Sahm rule is calculated by calculating the three-month moving average of the unemployment rate. One then identifies the lowest value of the three-month moving average in the past 12 months. If the figure has risen by at least 0.50%, it means that there is a high possibility of a recession happening. 

Goldman Sachs analysts also expect that the US will go through a recession later this year or in early 2025.

A recession is often a bad thing for the economy but a good one for stocks as we saw in 2000, 2009, and 2020. In all these situations, the Fed has intervened by slashing interest rates. In 2020, it responded to the Covid-19 pandemic by cutting rates to zero.

It will likely cut interest rates in the next meeting in September. Some analysts anticipate that the Fed will respond by delivering a jumbo rate cut. Such a move would benefit the SCHD as investors rotate from money market funds to stocks.

To be clear: in the future, the Fed will lack tools to respond to such crises because of the soaring US debt. At that time, buyers of US debt will demand higher interest rates to hold it.

Corporate earnings are still strong

SCHD ETF soared to a record high last week

The other catalyst for the SCHD ETF is that corporate earnings are still strong. While companies like Tesla, Intel, and Amazon have made headlines, most companies have reported solid financial results. 

Data by Factset shows that 75% of all companies in the S&P 500 index have published their second-quarter earnings. Of these analysts, 78% of them have reported a positive EPS surprise while 60% have beaten their revenues.

The revenue growth rate has been strong, with the average rate coming in at 11.50%, its highest point since Q4 of 2021. Companies have also released positive earnings growth revisions. 

Therefore, a combination of higher earnings growth and Federal Reserve rate cuts will likely lead to more upside for the SCHD ETF in the long term. Besides, the fund has a long history of rising since it was trading at $17 in its inception and has rallied to over $80 today. 

In this period, the fund has suffered a bear market three times: August 2025, March 2020, and January 2022. It has always bounced back after these bear market movements and recently jumped to a record low.

Therefore, there is a likelihood that the SCHD ETF will bounce back later this year as the conditions improve.