While the U.S. Federal Reserve continued its easing campaign last week, its statement that “strains have eased somewhat” closes the door a little on further interest rate cuts, according to UBS strategist George Vasic. This is important for investors because the transition from cutting to holding rates steady means it is “time to get less defensive and more cyclical,” he told clients in a note.
Looking back to the summer of 1998’s deflation shock (the market peaked in July) demonstrates that sectors like gold, staples and utilities led the market from its peak until the last Fed cut in November, Mr. Vasic said. But when the Fed went on hold, consumer discretionary, technology and telecom took over.
“Indeed, the most pronounced shift was in the golds, which rose 33% through the last Fed cut, and then fell 30%,” he wrote. And while the performance of gold reflected a rebound in the U.S. dollar, which Mr. Vasic thinks is unlikely this time around, it nonetheless suggests that when the Fed stops cutting rates, it may be time to move from golds into more diversified metals.
So with his recommendation that a more offensive sector tilt is best when the Fed goes on hold, Mr. Vasic likes lagging industrials, telecom and consumer discretionary names.