Due to the Fed's rate cuts, Wall Street traders face a unique challenge when betting on the stock market: history is no longer a guide.

When interest rates fall, a classic trading strategy is to buy stocks in defensive industries, as the demand for these industries is not affected by the economic situation, such as consumer commodities and the healthcare industry. Another popular investment option is high-dividend stocks in sectors like utilities, as the Fed typically lowers borrowing costs to counter economic weakness or boost a recessionary economy. During this period, companies in growth industries like technology often experience impact, but that is not the case now. Instead, the economy is growing, stock indices are reaching historic highs, corporate profits are expected to continue expanding, and the Fed has just made a large 50 basis point rate cut, marking the beginning of an easing cycle. This situation has no playbook to reference.

"The Fed's significant rate cut in a fairly loose financial environment is a clear signal for stock investors to be rather aggressive," said Frank Monkam, Senior Portfolio Manager at Antimo. "Traditional defensive stocks, such as utilities or consumer stocks, may not hold much appeal."

So where are investment experts looking now?

Walter Todd, President and Chief Investment Officer at Greenwood Capital Associates LLC, said financial sector stocks are a good starting point. He is buying stocks of regional banks such as Bank of America, JPMorgan, and PNC Financial Services Group Inc. He said, "The Fed's rate cut should lower their financing costs. The interest they pay on deposits should be lower than two days ago, which should help improve their net interest margins."

David Lefkowitz, Head of U.S. Equities at UBS Global Wealth Management, is also bullish on financial stocks and industrial stocks closely related to a strong economy.

This positioning goes against the lessons of history. According to data compiled by Strategas Securities, in the past four interest rate cut cycles over the past thirty years, investors have pursued so-called defensive stocks such as utilities, consumer staple stocks, and healthcare stocks, which pay high dividends and are favored by investors when bond yields decline. Strategas data shows that in the six months following the initial rate cut in these four cycles, the best-performing industry was utilities, with an average increase of 5.2%. The technology sector performed the worst, dropping 6.2%, while real estate, consumer goods, and the financial sector also experienced significant declines.

Under the circumstances of the Fed's interest rate cut and stable economy, overall bullishness is a historical winning strategy.

According to data from Bank of America, since 1970, as long as the economy avoids recession, the S&P 500 index has averaged a 21% increase in the year after the first interest rate cut during easing cycles. In addition, in the past nine easing cycles, eight of them occurred during profit deceleration. However, Savita Subramanian, head of US stocks and quantitative strategy at Bank of America, wrote in a note to clients last Friday that profits are currently expanding, which benefits cyclical stocks and large cap value stocks, stating that "There are no rules set by the Fed - every easing cycle is different."

Currently, investors seem to be reinvesting in big tech stocks and other growth areas of the market. Goldman Sachs' bulk brokerage data shows that last week, hedge funds' net buying of US technology, media, and telecom stocks reached the highest level in four months.

Meanwhile, as interest rates decline, others are drawn to stocks that will benefit from increased spending by Americans. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said, "Consumers will be very excited. Seeing interest rates drop, seeing the opportunity to get a mortgage, this will stimulate consumption, whether it's the real estate market, auto market, or year-end spending."

Joe Gilbert, portfolio manager at Integrity Asset Management, sees opportunities in shopping mall operators like Simon Property Group Inc. and industrial sectors of the real estate industry like Prologis Inc. "Many real estate companies need refinancing," Gilbert said. "We believe low interest rates will definitely help them."

Utility stocks are also popular, but not because of their dividends. According to Mike Bailey, director of research at Fulton Breakefield Broenniman LLC, these companies are attracting investors by venturing into the field of artificial intelligence technology. In fact, utility companies have performed very well this year, rising 26% and becoming the second best-performing component of the S&P 500 index, to the extent that their valuations may have been overestimated.

Bailey said, "It's hard to know if we've front-loaded all the good news about utilities. It feels like these companies may not have another wave of outperforming the market."

Nevertheless, in this frenzy bull market, everything seems possible, at least for now. Investors have shaken off concerns about overvalued tech stocks, increased volatility, US political uncertainty, and a slowdown in hiring. Few Wall Street analysts predicted that the S&P 500 index would surpass 5700 points by the end of 2024. However, after a 24% increase last year, the index has risen another 20% this year and closed at 5703 points last week. "This is the best-case scenario," said Blancato. "By the end of this year, we might have a chance to reach nearly 6000 points."

Editor/ping