The Fed's "non-recessionary rate cut" traditional defensive strategy no longer works

As the Federal Reserve begins its first easing cycle in four years, has the stock market's interest rate cut trading manual changed?

Generally speaking, when the Federal Reserve cuts interest rates to boost the economy, investors tend to choose defensive stocks and high-dividend stocks for risk aversion, and avoid growth stocks including the technology industry that are vulnerable to macroeconomic influences.

However, since the U.S. economy was still resilient during this rate cut, the rate cut led to a rise in technology stocks, a record high in the stock market, continued economic growth, and better corporate earnings prospects.

From the perspective of capital flows after the rate cut, investors are turning from defensive stocks to cyclical stocks.

According to Goldman Sachs Group's prime brokerage data, hedge funds bought TMT stocks (technology, media, and communications) for the third consecutive week last week, with net positions reaching the largest in four months. At the same time, defensive stocks saw the largest net selling in more than two months, with utility stocks seeing the largest outflow of funds in more than five years.

"The Fed's choice to cut interest rates sharply in a fairly loose financial environment is a clear signal to the market that it should take an offensive position."

"Traditional defensive stocks, such as utilities or consumer stocks, may not be very attractive."

Why is this rate cut different from history?

Why is this rate cut a "non-recessionary rate cut"?

According to Bank of America data, eight of the nine easing cycles since 1970 occurred when corporate earnings slowed. But Savita Subramanian, the bank's head of equity and quantitative strategy, wrote in a note to clients: "The current situation is that earnings are expanding, which is good for cyclical stocks and large-cap stocks."

This means that the Fed is not cutting rates because of a recession. Subramanian said:

"The Fed has no script - every easing cycle is different."

However, judging from the historical rate cut cycles, each rate cut by the Fed tends to drive the overall market up.

According to Bank of America data, in the absence of a recession, the S&P has risen an average of 21% in the year after the Fed's first rate cut since 1970.

Investment style switching: banks, technology, and real estate are popular

So, what kind of investment style has the Fed's "non-recessionary rate cut" brought about?

As Subramanian said, investors are turning to cyclical stocks, large-cap stocks and other industries that are growing.

Benefiting from the stimulating effect of the loose environment on consumption, industries such as real estate and automobiles are also expected to grow. "You're going to see excited consumers -- lower mortgage rates are going to stimulate consumption, both in the housing market and in the auto market," said Phil Blancato, CEO of Ladenburg Thalmann Asset Management. Utilities also continue to be popular in traditional trading strategies as the AI ​​investment boom increases the appeal of the sector. In fact, utilities are up 26% so far this year, making them the second-best performing sector in the S&P.