Fed's "Non-Recession Rate Cut": Traditional Defenses Fail
As the Federal Reserve begins its first easing cycle in four years, has the stock market's interest rate cut playbook changed?
Generally speaking, when the Fed cuts interest rates to boost the economy, investors often opt for defensive stocks and high-dividend stocks for safety, avoiding growth stocks, including those in the technology sector, which are susceptible to macroeconomic influences.
However, this time around, the U.S. economy still shows resilience, and the rate cut has led to technology stocks taking the lead, the stock market hitting new highs, the economy continuing to grow, and corporate earnings prospects improving.
Looking at the post-rate cut capital flows, investors are shifting from defensive stocks to cyclical stocks.
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According to data from Goldman Sachs' prime brokerage business, last week, hedge funds bought TMT stocks (Technology, Media, Telecommunications) for the third consecutive week, with net positions reaching the highest in four months, while defensive stocks saw the largest net selling in over two months, with utilities stocks experiencing the largest outflow in more than five years.
Antimo's Senior Portfolio Manager, Frank Monkam, stated: "The Fed's decision to cut rates significantly in a financial environment that is quite loose is a clear signal to the market that it should adopt an aggressive position in its holdings."
"Traditional defensive stocks, such as utilities or consumer stocks, may not be very attractive."
Why is this rate cut referred to as a "non-recessionary rate cut"?
According to data from Bank of America, out of nine easing cycles since 1970, eight occurred when corporate earnings were slowing down.
However, the bank's head of equity and quantitative strategy, Savita Subramanian, wrote in a report to clients: "The current situation is that earnings are expanding, which is favorable for cyclical stocks and large-cap stocks."
This means that the Fed is not cutting rates due to an economic recession.
Subramanian said: "The Fed has no script - each easing cycle is different."
However, looking at historical rate cut cycles, each time the Fed cuts rates, it often leads to an overall rise in the market.
Data from Bank of America shows that in the absence of an economic recession, since 1970, the S&P has averaged a 21% increase within one year after the Fed's first rate cut.
So, what kind of investment style has the Fed's "non-recessionary rate cut" brought?
As Subramanian said, investors are turning to cyclical stocks, large-cap stocks, and other growing industry sectors.
Benefiting from the stimulative effect of the loose environment on consumption, industries such as real estate and automobiles are also expected to grow.
Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said: "You will see excited consumers - the decline in mortgage interest rates will stimulate consumption, whether it's the housing market or the automobile market."
Traditional trading strategy utilities stocks also continue to be hot, as the AI investment boom increases the attractiveness of the industry.
In fact, utilities stocks have risen by 26% year-to-date, making it the second-best performing sector in the S&P.
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