BofA investment chief reveals his 2nd-half playbook: Buy dips in bonds, and sell stocks after the first rate cut

• Investors should buy dips 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 reversal 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 dips in bonds and sell stocks after the Federal Reserve makes its first interest rate cut.

The Fed is largely expected to begin cutting interest rates in the second half of the year, with the first cut most likely occurring at the September FOMC meeting, 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 taking 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 getting more confident about turning more bullish on bonds.

"Cyclical always able to trump secular and we say 3Ps of Positioning, Profits, Policy means H2 reversal of 'ABB' Anything But Bonds trade," Hartnett said.

That means investors should "buy any dip in bond prices," Hartnett added.

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

Positioning

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

Profits

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

Policy

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