Soochow: What to buy after the first interest rate cut by the Federal Reserve?

Soochow released a research report stating that the current economic outlook is not low and there are no signs of recession, indicating a preemptive rate cut cycle. In a preemptive rate cut scenario, American stocks usually perform better, and in the long term, preemptive rate cuts are more favorable for equity assets. In the case of a soft landing in the US economy, rate cuts help further lower corporate financing costs and improve profitability. Looking back at the past three preemptive rate cuts, Soochow found that growth stocks in sectors such as information technology, healthcare, and financials tend to perform better before and after rate cuts, showing more sensitivity to rate changes and benefiting more from the liquidity easing brought by rate cuts. Global investment trends observed by Soochow: With the official 50 basis point rate cut by the Federal Reserve in September, the US is entering an easing cycle. What can we expect for asset performance after the rate cut? Drawing lessons from history: Soochow believes that the current scenario closely resembles preemptive rate cuts. When reviewing rate cut cycles since 1980, they can generally be divided into preemptive rate cuts and recessionary rate cuts. Recessionary rate cuts usually occur when there is a clear recession in the economy, aimed at stimulating the economy with higher rate cuts; while preemptive rate cuts often occur when the economic fundamentals weaken and pose downside risks, aiming to prevent a major recession with milder rate cuts in terms of extent and duration. The current rate cut is considered preemptive for the following reasons: 1) In terms of inflation, the current inflation control has been relatively smooth, with CPI lower than historical averages and core inflation close to previous preemptive rate cut averages; 2) In terms of employment, the labor market has shown high economic vitality, with unemployment rates significantly below historical averages and non-farm job growth maintaining median levels; 3) Economically, before the current rate cut, the real GDP growth rate remained around 3% quarter-on-quarter, closer to the average 4.3% growth rate of preemptive rate cuts, significantly higher than the average growth rate of recessionary rate cuts. Overall, the current economic outlook is positive and shows no signs of recession, making it a preemptive rate cut cycle. In a preemptive rate cut scenario, American stocks usually show better performance: American stocks: Typically, the first month after a rate cut is an important period for stock price increases, benefiting from the liquidity easing and valuation boosts brought by rate cuts. However, there are differences in performance in different types of rate cut cycles. In the long term, preemptive rate cuts are more favorable for equity assets, with American stocks showing higher gains in previous preemptive rate cut cycles. In the case of a soft landing in the US economy, rate cuts help further lower corporate financing costs and improve profitability. US bonds, US dollar: 1) US bonds usually see increases before rate cuts due to expectations of economic and rate declines, with prices rising rapidly before rate cuts, but narrowing in the first 1-2 months after the rate cut, especially in preemptive rate cut stages where the stronger economic fundamentals can suppress bond market performance. On the other hand, in the background of a recessionary rate cut, US bonds significantly outperform. 2) The US dollar tends to decline with a decrease in US bond yields, but economic fundamentals may support the dollar's trend, for example, in 2014 when the rate cut began, the US economy experienced a soft landing and showed strong economic performance, resulting in a relatively stable trend for the US dollar index. Commodities: 1) Copper usually declines in most rate cut cycles; 2) Gold prices mostly increase during rate cut cycles due to declining interest rates and the US dollar. Gold prices show a larger increase during recessions and periods of rising safe-haven sentiment, such as during the 2008 financial crisis. In stable economic periods, gold may not be the best choice. 3) Crude oil does not follow a clear pattern and is influenced to some extent by supply-demand dynamics and geopolitical conflicts. After this rate cut, how will various assets trade? 1) American stocks: Looking back at the last three preemptive rate cuts, Soochow found that before and after the rate cut, growth stocks in sectors such as information technology, healthcare, and financials tend to perform better, showing more sensitivity to rate changes and benefiting more from the liquidity easing brought by rate cuts. Based on this, Soochow believes that in the future, the relatively certain investment themes for American stocks are: 1) Rate-sensitive sectors: small-cap growth & biotechnology, financials, real estate. In terms of style, small-cap growth may outperform large-cap stocks. On one hand, rate cuts reduce short-term debt pressure for small and medium enterprises, increasing profit expectations and valuations. On the other hand, in the context of rate cuts, the "soft landing" of the US economy boosts sentiment for small and medium enterprises. Therefore, reflecting on the past, returns for small-cap growth mainly driven by the Russell 2000 growth index in the 3, 6, and 12 months after the rate cut started were 1.8%, 12.1%, and 47.7%, respectively, mostly higher than the S&P 500's 2.3%, 7.3%, and 7.8%. In terms of industries, the biggest "winners" may be biotechnology stocks. Firstly, the certainty brought by rate cuts benefits biotechnology, which currently has a low position level. Additionally, with the rise of AI, biotech has become an important global investment direction. Furthermore, financials and real estate are directly affected by interest rates and may still see decent increases in the future due to profitability support. 2) Defensive sectors: Utilities. The utility sector benefits from increased electricity investments due to lower rates and can also hedge against economic slowdown risks. There are concerns about the technology sector, with the biggest worry being deleveraging. Although from a discounted perspective, the Fed rate cut benefits the valuation of American stocks, there are some considerations: 1) Tech companies currently have a large amount of cash on hand, so the impact of rate cuts on their refinancing is minimal. 2) Tech stocks, led by companies like NVIDIA, may see a resurgence in deleveraging. 3) From a sentiment perspective, although the "Fab 7" tech stocks have been the most crowded trades in the last quarter, bullish sentiment has been decreasing, falling from 70% in July to less than 50% in September. 2) US bonds: Expected to see a downward trend followed by a rebound. US bond yields are usually the most sensitive to rate cut cycles. Looking back at rate cut cycles since 1994, the 10-year US bond yields have consistently shown declines after rate cuts. However, after the rate cut is implemented and considering that rate cut expectations were too high beforehand, there may be insufficient downward pressure on US bond yields, leading to a rebound. 3) US dollar: Expected to fall slightly, as rate cuts are implemented.However, the extent is limited. During a rate-cutting cycle, the US dollar usually falls. However, considering the fundamental resilience of the US economy, which is stronger compared to the performance of the Chinese and European economies, this could provide some support to the central position of the US dollar, limiting the extent of its fall.Gold: Caution in stages. 1) Considering that this rate cut is intended as a preemptive measure, if the US economy achieves a "soft landing" in 2024, the upside potential for gold may be lower than market expectations. Looking back at history, under a preemptive rate cut scenario, gold's increase is significantly lower than under a recessionary rate cut. 2) Inflation may cool faster than policy rates, keeping real interest rates relatively high, which may also hinder the rise in gold prices to a certain extent. 3) Bitcoin may continue to diversify gold allocations. Spot Bitcoin ETFs have become an important asset class, as institutional investors are gradually including "digital gold" (Bitcoin) in their portfolios, which may divert some demand for gold allocations. Risk warning: Geopolitical risks exceeding expectations; Fed rate cuts exceeding expectations; US economy experiencing a hard landing; past experiences do not necessarily predict the future, etc.