Why This Is a “Buy the Rumor, Sell the News” Scenario By Investing.com

Investors are facing a precarious outlook as the Federal Reserve's planned interest rate cuts may not provide the boost to risk assets that many are expecting, analysts at BCA Research said in a note this week.

The firm said the Fed's easing cycle is shaping up to be a classic “buy the rumor, sell the news” scenario.

In its recent note, the investment research firm notes that global risk assets bottomed in October-November 2022, as investors began to anticipate the end of monetary tightening.

BCA says this was the time to “buy the rumor” as markets reacted to the expectation of future rate cuts.

However, they point out that the reality is that bond yields hit new highs in October 2023, and the Fed continued to raise rates through July 2023, defying expectations of an early turnaround.

BCA Research now expects the Fed to begin cutting rates in September, which they believe will mark the moment to “sell the news.”

“The Fed will almost certainly start cutting interest rates in September, which will likely mark the end of risk trading in financial markets, i.e. the time to 'sell the news,'” BCA writes.

The reasoning is based on his forecast of a “hard landing” for the US economy, a scenario in which growth will be close to zero or slightly negative, leading to a substantial contraction in corporate profits and rising unemployment.

They warn that while a hard landing is not as severe as a hard landing, it will still have negative ramifications for risk assets.

“Just as in 2001, a US economy flirting with recession will cause corporate profits to contract materially and stock prices to decline,” BCA Research notes.

BCA concludes: “Investors should maintain their position in global risk assets and asset allocators should favour bonds over equities. We reiterate our underweight position in global emerging market equity and credit portfolios.”