BofA’s Hartnett Says Sell Stocks at the Fed’s First Rate Cut

(Bloomberg) — Stocks are likely to fall when the Federal Reserve delivers its first interest-rate cut because the pivot will come as data signal a hard — rather than soft — landing for the US economy, according to Bank of America Corp.’s Michael Hartnett.

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In the history of the start to Fed easing since 1970, cuts in response to a downturn have proved negative for stocks and positive for bonds, the BofA strategist wrote in a note, citing seven examples that demonstrated this pattern. “One very important difference in 2024 is extreme degree to which risk assets have front-run Fed cuts,” Hartnett said.

The equity market is already showing signs of weakness as investors grow more convinced that the US central bank will have to ease rapidly in the second half. That pullback has stoked volatility in equity markets, with the CBOE Volatility Index spiking above a key 20 level for only the second time in 2024.

Stocks slid on Wall Street and policy-sensitive two-year notes led a rally in Treasuries after data on Thursday showed unemployment claims hit an almost one-year high and manufacturing shrank. That’s a sharp difference from the status quo for over a year, when equity markets typically welcomed soft economic data as sign that policy could be eased without triggering an inflation rebound. Swap traders now fully price in three Fed rate cuts this year.

US stock futures extended the declines Friday and bonds continued to gain as traders turned their attention to the July employment report due later in the day. The unemployment rate in America is seen holding at 4.1%, the highest since November 2021, following increases in each of the last three months.

Climbing levels of unemployment have brought the jobless rate close to matching a recession indicator developed by former Fed economist Claudia Sahm, which has a perfect track record over the last half-century. Hartnett said he is monitoring the data for the 4.3% level that would trigger this signal in the second half.

–With assistance from Farah Elbahrawy.