The Federal Reserve's "insurance rate cuts" - traditional defensive strategies are no longer effective

As the Federal Reserve opens its first easing cycle in four years, has the stock market's rate-cut trading manual changed?

Generally, when the Fed cuts rates to boost the economy, investors often choose defensive stocks and high-dividend stocks for hedging purposes, avoiding growth stocks including the technology sector that are susceptible to macroeconomic impacts.

However, due to the resilience of the U.S. economy during this rate cut, the post-cut scenario has seen tech stocks leading the gains, the stock market hitting historic highs, continued economic growth, and improving corporate profit prospects.

Looking at the flow of funds post-rate cut, investors are shifting from defensive stocks to cyclical stocks.

According to Goldman Sachs' bulk brokerage data, last week, hedge funds bought TMT stocks (technology, media, telecommunications) for the third consecutive week, with net positions reaching the highest level in four months. At the same time, defensive stocks saw the largest net selling in over two months, with outflows from utility stocks reaching the largest scale in over five years.

Frank Monkam, Senior Portfolio Manager at Antimo, stated:

"The Fed's significant rate cut in a fairly loose financial environment sends a clear signal to the market that an aggressive position should be taken."

"Traditional defensive stocks, such as utilities or consumer stocks, may not be very attractive."

Why is this rate cut different from history?

Why is this rate cut considered a "non-recessionary rate cut"?

According to Bank of America's data, in the 9 easing cycles since 1970, 8 occurred during a slowdown in corporate earnings. However, the bank's Head of Stocks and Quantitative Strategy, Savita Subramanian, wrote in a report to clients: The current situation is that earnings are expanding, which benefits cyclical and large-cap stocks.

This means that the Fed is not cutting rates due to an economic recession. Subramanian stated:

"The Fed doesn't have a script - every easing cycle is different."

However, historically, each rate cut by the Fed has tended to drive the overall market higher.

Bank of America data shows that since 1970, in the absence of an economic recession, the S&P has averaged a 21% increase in the year following the Fed's first rate cut.

Investment Style Shift: Banks, Tech, Real Estate in Demand

So, what investment style has the Fed's "non-recessionary rate cut" brought about?

As Subramanian mentioned, investors are shifting towards cyclical stocks, large-cap stocks, and other growing industry sectors.

Benefiting from the stimulus of loose conditions on consumption, industries such as real estate and automotive are also expected to see growth. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, stated:

"You will see excited consumers - the drop in mortgage rates will stimulate consumption, whether in the housing market or the automotive market."

Traditional utility stocks in conventional trading strategies remain hot as the AI investment boom has increased the sector's attractiveness. In fact, utility stocks have risen by 26% year-to-date, making it the second-best performing sector in the S&P