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Investors should buy dips in bonds and sell stocks after the Fed’s first rate cut, according to Bank of America.
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Bank of America investment strategist Michael Hartnett’s call is a reversal of his “anything but bond trading” call.
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The Federal Reserve is expected to cut interest rates in the second half of the year.
Bank of America investment strategist Michael Hartnett is shaking up his trading book for the second half of the year.
In a note on Friday, Hartnett advised investors to buy dips in bonds and sell stocks after the Federal Reserve makes its first rate cut.
The Fed is largely expected to start cutting rates in the second half of the year, with the first cut most likely coming at the September FOMC meeting, the CME FedWatch Tool shows.
Hartnett’s call is a reversal of his call for “everything but bonds,” which was based on the idea that AI is taking over the stock market and therefore few other assets could capture investors’ attention and money.
But after April’s Core PCE report failed to boost tech stocks on Friday, Hartnett is growing more confident in his bond optimism.
“Cyclical can always trump secular and we say 3Ps of Positioning, Earnings, Policy means a second half reversal in ‘ABB’ trading in everything but bonds,” Hartnett said.
That means investors should “buy any dip in bond prices,” Hartnett added.
According to Hartnett, these are the three reasons why investors should focus on bonds instead of stocks in the second half of 2024.
Positioning
“Investors are very long cash, IG bonds, stocks/tech, some long 2-year UST to play Fed cuts, but no one has long 30-year debt dynamics/slowdown concerns = more budget surplus; lower long-term rates versus clear ‘pain trade’ in H2,” Hartnett explained in a mid-May note.
Gain
“Credit and equities react bullishly to ‘soft landing’ chances rising again; but the chances of a ‘hard landing’ are too low given the stagnation in real retail sales, the slowing of the global PMI recovery and the shift in the labor market from ‘unambiguously strong’ to ‘ambiguously strong’ to ‘ambiguously’; 30-year Treasury best cyclical hedge for a hard landing,” Hartnett said.
Policy
“The US CPI is on track to reach 3¾-4½% by the US presidential election in November; while the Fed is looking to cut spending at the first opportunity, inflation in ’24 has prevented the Fed from cutting spending and continuing tight monetary policy and in terms of fiscal policy, real US government spending has reached $6.3 trillion in the last twelve months, but the fourth year of the US presidential cycle is always the strongest for government spending. Investors recognize that fiscal stimulus is ‘as good as it gets’. ;
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