The Zhitong Finance App learned that Dongwu Securities released a research report saying that the current economic boom is not low and shows no signs of recession. It is a cycle of preventive interest rate cuts. Under preventative interest rate cuts, US stocks generally perform more prominently. In the long run, preventive interest rate cuts are more beneficial to equity assets. In the US economysoft landingIn this case, interest rate cuts will help further reduce corporate financing costs and improve profitability. Going back to the past 3 rounds of preventive interest rate cuts, Dongwu Securities found that before and after interest rate cuts, growth stocks such as information technology, healthcare, and cyclical sectors represented by finance often performed better, were more sensitive to interest rate changes, and benefited more from liquidity easing brought about by interest rate cuts.

Global investment trends observed by Dongwu Securities:

The Federal Reserve officially cut interest rates by 50 bps in September, which means that the US has begun an easing cycle. After the interest rate cut is implemented, how will subsequent assets be interpreted?

Learn from history: Dongwu Securities believes this round is closer to preventive interest rate cuts.

Reviewing the cycle of interest rate cuts since 1980 can be broadly divided into preventive interest rate cuts and recessionary interest rate cuts. Among them, recessionary interest rate cuts usually occur when the economy is in clear recession and are aimed at stimulating the economy, and interest rate cuts are often higher; while preventative interest rate cuts mostly occur when economic fundamentals weaken and there are downside risks, to prevent large-scale economic recession, and the extent and duration of interest rate cuts are usually mild.

The reason for this interest rate cut is a preventative interest rate cut: 1) In terms of inflation, the current round of inflation was relatively smooth. The CPI was lower than the historical average, and core inflation was also close to the average reading of previous preventive interest rate cuts; 2) In terms of employment, the job market showed a high level of prosperity, and the unemployment rate was far below the historical average, with new increasesNumber of people employed in non-agricultural industriesIt also remains at a medium level; 3) At the economic level, the actual GDP discount rate remained around 3% per annum before the current round of interest rate cuts, which is close to the 4.3% average growth rate of preventive interest rate cuts, and far higher than the average growth rate of recessionary interest rate cuts.

In summary, the current economic boom is not low, showing no signs of recession. It can be seen as a cycle of preventive interest rate cuts.

Under preventative interest rate cuts, US stocks generally performed more prominently:

US stocks: Usually, 1 month after interest rate cuts is an important window for US stocks to rise, benefiting from easier liquidity and higher valuations brought about by interest rate cuts. However, since then, different types of interest rate cut cycles have diverged. In the long run, preventative interest rate cuts are more beneficial to equity assets. In the long run, US stocks have risen ahead of the curve. In the case of a soft landing in the US economy, interest rate cuts will help further reduce corporate financing costs and improve profitability.

US debt, US dollar: 1) US debt usually runs out of the interest rate cut cycle. Due to expectations of a decline in the economy and interest rates, the price of US bonds tends to rise rapidly before interest rate cuts, while the increase narrows within January-February after interest rate cuts begin, especially during the preventive interest rate cut phase. Since economic fundamentals are relatively strong, it will suppress bond market performance to a certain extent. Conversely, in the context of recessionary interest rate cuts, the performance of US bonds “completely rode to dust.” 2) The US dollar often declines as US bond yields decline, but economic fundamentals may also support the trend of the US dollar. For example, in 2014, interest rate cuts began, the US economy landed softly, economic performance was strong, and the trend of the US dollar index was relatively stable.

Commodities: 1) Copper: Fell during most of the interest rate cut cycle; 2) Gold: In the interest rate cut cycle, the price of gold mostly rose as interest rates and the US dollar declined. It was more obvious in the range of recession and risk aversion. The price of gold increased even more, such as the 2008 financial crisis, but gold was not the best choice in the range where the economy stabilized. 3) Crude oil: There is no clear pattern; it depends to some extent on changes in supply and demand patterns and geopolitical conflicts.

After this interest rate cut, how are all types of assets traded?

1. US stocks: Going back to the past 3 rounds of preventive interest rate cuts, Dongwu Securities found that before and after interest rate cuts, growth stocks such as information technology, healthcare, and cyclical sectors represented by finance often performed better, were more sensitive to interest rate changes, and benefited more from liquidity easing brought about by interest rate cuts.

Based on this, Dongwu Securities believes that in the future, the main investment line for US stocks is relatively determined:

1) Interest rate sensitive: small market growth & biotechnology, finance, real estate.

Stylistically, small market growth is likely to outperform the larger market. On the one hand, interest rate cuts reduced the short-term debt pressure on SMEs and raised profit expectations and valuations; on the other hand, in the context of interest rate cuts, the US economy's “soft landing” boosted small and medium market sentiment. Therefore, through the review, the small market grew mainly by Russell 2000. The increases 3, 6, and 12 months after interest rate cuts began were 1.8%, 12.1%, and 47.7%, respectively, which were basically higher than 2.3%, 7.3%, and 7.8% of the general market (S&P 500).

The biggest “winners” in the industry are probably biotech stocks. First, there is a high degree of certainty brought about by interest rate cuts. Judging from the current position structure, biotechnology is still at a lower level, so biotechnology has a favorable position structure, or transactions with the greatest flexibility in interest rate cuts; second, benefiting from the rise of AI, biotech has become an important direction for global investment.

In addition, finance and real estate are directly affected by interest rates and are supported by profits. The two major industries are likely to see good increases in the future.

2) Defensive type: utilities. The utility sector not only benefits from rising electricity investment due to falling interest rates, but also hedge against the risk of economic slowdown.

The tech industry is relatively concerned; the biggest concern is deleveraging. Although from a discount perspective, the Fed's interest rate cut is beneficial to increasing the valuation of US stocks. However: 1) Technology companies currently have large amounts of cash on hand, and interest rate cuts have little impact on their refinancing. 2) Technology stocks, led by Nvidia, may once again experience deleveraging. 3) From an emotional perspective, although the “7 US Stock Sisters” have been the most crowded trading in the past quarter, bullish sentiment has continued to weaken, falling from 70% in July to less than 50% in September.

2. US debt: expected to rise first. Interest rates on US bonds are usually the most sensitive to the “perception” of the interest rate cut cycle. After reviewing the various cycles of interest rate cuts since 1994, 10-year US bond yields all showed a marked decline. However, after the interest rate cut boots were implemented, considering that the previous interest rate cut expectations were too full, there was clearly insufficient momentum under US bond yields; on the contrary, there will be a correction.

3. US dollar: The center declined, but the magnitude was limited. During the interest rate cut cycle, the US dollar usually falls back. However, considering that the fundamentals of the US economy are relatively resilient, the performance is still strong compared to the Chinese and European economies, so it supports the US dollar center to a certain extent, and the extent to which the decline is likely to be limited.

4. Gold: phased prudence. 1) Considering that this interest rate cut is intended to be a preventive interest rate cut, if the US economy achieves a “soft landing” in 2024, the room for gold to rise may fall short of market expectations. Going back in history, in the context of preventive interest rate cuts, the increase in gold was significantly lower than that of recessionary interest rate cuts. 2) Inflation is likely to cool down faster than policy interest rates, and real interest rates will remain relatively high, which will also slow down the rise in gold prices to a certain extent. 3) Bitcoin is likely to continue to diversify the gold allocation. Spot Bitcoin ETFs have become an important asset allocation category. Institutional investors are gradually including “digital gold” (Bitcoin) in their portfolios, which will also divert certain gold allocation requirements.

Risk warning: geopolitical risks exceeded expectations; the Fed cut interest rates exceeded expectations; the US economyhard landing; Historical experience does not represent the future, etc.