Why this is a “buy the rumor, sell the news” scenario by Investing.com

Investors are navigating a shaky landscape as anticipated interest rate cuts by the Federal Reserve may not provide the boost to risk assets that many are hoping for, according to analysts at BCA Research 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 their recent note, the investment research firm points out that global risk assets bottomed out in October-November 2022 as investors began anticipating the end of monetary tightening.

BCA argues that this was “buy the rumor” time as markets reacted to expectations of future rate cuts.

However, they note 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 pivot.

BCA Research now expects the Fed to start cutting interest rates in September, which it believes will mark the “sell the news” moment.

“The Fed is now almost certain to start cutting interest rates in September, which will likely mark the end of risk trading in the financial markets, aka ‘sell the news’ time,” BCA writes.

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

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

“As in 2001, a US economy flirting with recession will cause corporate profits to shrink significantly and share prices to fall,” notes BCA Research.

The BCA concludes: “Investors should remain busy with global risk assets and asset allocators should favor bonds over equities. We reiterate our underweight in EMcin’s global equity and credit portfolios.”