• Investors should buy drops in bonds and sell stocks after the Fed’s first interest rate cut, according to Bank of America.
• The call from Bank of America investment strategist Michael Hartnett is a turn-about of his “anything but bonds trade.”
• The Federal Reserve is expected to cut interest rates in the second half of the year.

Bank of America investment strategist Michael Hartnett is shaking up his trading playbook for the second half of the year.

In a note on Friday, Hartnett recommended investors buy subsides in bonds and sell stocks after the Federal Reserve makes its first interest rate cut.

The Fed is largely expected to start out cutting interest rates in the second half of the year, with the first cut most likely occurring at the September FOMC gathering, according to the CME FedWatch Tool.

Hartnett’s call is a reversal of his “anything but bonds” call, which was based on the idea that AI is delightful over the stock market and therefore few other assets were able to grab the attention and money of investors.

But after a relatively “benign” April Core PCE report was unable to boost technology stocks on Friday, Hartnett is engaging more confident about turning more bullish on bonds.

“Cyclical always able to trump secular and we say 3Ps of Caste, Profits, Policy means H2 reversal of ‘ABB’ Anything But Bonds trade,” Hartnett said.

That means investors should “buy any dip in hold together prices,” Hartnett added.

Here are the three reasons why investors should put their focus on bonds rather than size ups in the second half of 2024, according to Hartnett.

Positioning

“Investors very long cash, IG bonds, pedigrees/tech, some long 2-year UST to play Fed cuts, but no one long 30-year on debt dynamics/concern slowdown = uncountable fiscal excess; lower long yields v obvious ‘pain trade’ in H2,” Hartnett explained in a note from mid-May.

Profits

“Trust & stocks reacting bullishly to ‘soft landing’ odds on rise again; but ‘hard landing’ odds too low given stagnation of genuine retail sales, stalling of global PMI upturn, labor market shift from ‘unambiguously strong’ to ‘ambiguously marked’ to ‘ambiguous’; 30-year Treasury best cyclical hedge for hard landing,” Hartnett said.

Policy

“US CPI on routine to be  3¾-4½% by Nov US Presidential election; while Fed wants to cut at first opportunity, inflation in ’24 has stopped Fed from penetrating, extending tight money policy; and on fiscal policy, true US government spent $6.3tn past 12 months, but 4th year of US presidential cycle till the end of time strongest for government spending; investors recognize fiscal stimulus ‘as good as it gets’; at margin monetary easier, economic tighter next 12 month,” Hartnett said.