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According to Bank of America, investors should buy low on bonds and sell stocks after the Fed’s first rate cut.
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The comments by Bank of America investment strategist Michael Hartnett mark a shift in his “everything but bonds” approach.
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The Federal Reserve is expected to cut interest rates later this year.
Bank of America investment strategist Michael Hartnett is revamping his trading strategy for the second half of the year.
In a note on Friday, Hartnett recommended investors buy low on bonds and sell stocks after the Federal Reserve cut interest rates for the first time.
The Fed is expected to start cutting interest rates later this year, with the first cut likely coming at the September FOMC meeting, according to the CME FedWatch tool.
Hartnett’s comments are a reversal of his “anything but bonds” comments, which were based on the idea that AI has taken over the stock market and few other assets are capturing investor attention and capital.
But after a relatively “mild” April core PCE report failed to boost tech stocks on Friday, Hartnett is feeling more confident about being more bullish on bonds.
“Cyclic factors can always trump secular factors, and we think the 3Ps of positioning, earnings and policy mean a reversal in Q2 for ABB, anything trading outside of bonds,” Hartnett said.
That means investors “should buy when bond prices are falling,” Hartnett added.
There are three reasons why investors should focus on bonds over stocks in the second half of 2024, according to Hartnett.
positioning
“Investors are very long cash, investment grade bonds, stocks/tech and some 2-year Treasuries in anticipation of a Fed rate cut, but no one is long 30-year Treasuries due to concerns about debt trends/economic slowdown, which means more fiscal surpluses, lower long-term yields and clear ‘painful trading’ in the second half of the year,” Hartnett explained in a mid-May note.
Profit
“Credit and stocks have reacted bullishly to the possibility of a ‘soft landing’ and are rising again. However, a ‘hard landing’ seems too unlikely given stagnant real retail sales, stalled global PMI gains, and the labor market shift from ‘definitely strong’ to ‘ambiguously strong’ to ‘ambiguous.’ The best cyclical hedge against a hard landing is the 30-year Treasury,” Hartnett said.
policy
“US CPI is expected to be 3¾-4½% by the time of the US presidential election in November. The Fed would like to cut interest rates if given the opportunity, but 24 years of inflation have prevented it from doing so and monetary tightening is continuing. On fiscal policy, the US government has spent $6.3 trillion in the past 12 months, with the fourth year of a presidential election cycle always being the strongest for government spending. Investors perceive fiscal stimulus as ‘as good as it gets’. The next 12 months will see marginal monetary easing and fiscal tightening,” Hartnett said.
Read the original article on Business Insider
