LPL strategists don’t view the expected rate cut as a requirement to get in front of an impending recession. This is what we call an “insurance cut,” similar to what we saw in the mid-1990s. The U.S. economy is on firm footing, but the rest of the globe is slowing, and manufacturing data continues to disappoint. Additionally, the negative impacts from the U.S.-China trade dispute have opened the door for a potential rate cut later this week.
It’s also important to remember that we have tended to see more rate cuts after the first cut in a new cycle. For example, since 1990, there have been five cuts on average in the 12 months after an initial rate cut.
Growth vs. Value
What should investors do? After the first cut in a new cycle we’ve tended to see growth stocks outperform value stocks in the next 12 months. Additionally, large caps have outperformed small caps, and industrials has been one of the better performing sectors. LPL strategists continue to like large caps late in the business cycle, and industrials are one of their favorite sectors as well.
Value is different though; after significant underperformance, value could outperform growth going forward. Banks and financials (the largest part of value) have been improving, and this could lead to value strength. Also, value is historically less expensive relative to growth, and the overall sentiment toward value is historically low—which could be bullish from a contrarian point of view.
In the absence of recession, growth stocks have done quite well relative to value stocks after those initial Fed rate cuts. When those cuts came around recessions (not our expectation this time), growth-value has been a pitched battle.
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