First rate cut still selling? Bank of America: After years of stimulus, the economy has become "numb," and the market underestimates the magnitude of future stimulus needed

Global investors' confidence is waning, and rate cuts may not be able to reverse the bleak economic outlook.

Michael Hartnett, Chief Investment Strategist at Bank of America, recently issued a warning, advising investors to sell their assets decisively when the Fed cuts rates for the first time to prepare for the upcoming economic recession.

Generally, whether to buy or sell at the first rate cut depends on whether it will lead to an economic recession. Hartnett believes that the first rate cut by the Fed will result in a "harder landing" for the U.S. economy, hence the recommendation to "sell."

In his latest report, Hartnett stated that the market's expectations for rate cuts are overly optimistic, overlooking the diminishing fiscal stimulus effect and the greater rate cut needed to stimulate the economy. The first rate cut by the Fed may not bring the desired boost as expected.

The report provides the following reasons to support the "sell on the first rate cut" trade:

(1) The U.S. ISM index contracted in July, the last time this index fell below the 50 boom-bust line was in the 1980s, indicating that the risk of an economic recession is rising. Combined with non-farm data below expectations, it suggests that the U.S. economy is in distress, with a recession looming.

(2) Data from Bank of America's Global FMS shows that the risk of a "hard landing" for the U.S. economy has recently increased significantly, rising to 11%.

(3) The July unemployment rate rose to 4.3%, triggering the "recession indicator" Sam rule, which has occurred at every U.S. economic recession since 1950; the rule either precedes or coincides with the recession.

(4) Since 1970, the Fed has had 12 "first rate cuts."

Among them, every time the Fed chose to cut rates due to a Wall Street crash/credit crisis (i.e., panic rate cuts), it boosted risk assets. Historical data shows that after each panic rate cut by the Fed, the S&P has averaged a 20% increase in the following 6 months.

However, the uniqueness of this year lies in the fact that risk assets have risen to an extreme level— the stock market has risen by 32% in the first 9 months, while historically, the average increase in the stock market before the 12 "first rate cuts" was only 2%

However, Hartnett also predicts that after the election results are announced, regardless of who wins, it will trigger a new round of large-scale fiscal stimulus measures. The inevitable injection of new liquidity into the market will drive a new round of appreciation for US dollar assets.

He believes that as the effects of fiscal stimulus gradually peak, monetary policy will gradually ease over the next 12 months. Currently, major banks such as Citigroup and JP Morgan predict that the Federal Reserve will cut interest rates by 50 basis points at each of the next two FOMC meetings.

Furthermore, Hartnett also points out that despite the market's high expectations for interest rate cuts, investors should pay more attention to the housing market's response, which is the most sensitive indicator to interest rates. Currently, mortgage refinancing activity remains close to the lowest point in twenty-three years.

The report also reiterates the importance of being long on long-term bonds. Hartnett believes that as the pessimism brought by weak data continues to spread, the reversal of ABB (anything but bonds) trades will deepen further.