To The Moon

The Federal Reserve’s potential 25-basis-point rate cut has markets buzzing, and three pressing questions arise: Is it a good time to buy the dip in U.S. Treasuries? Will the Fed's rate cut push the S&P 500 higher? And is there reason to be bullish on a year-end rally?

Is It a Good Time to Buy U.S. Treasuries?

The Fed’s policy shift might signal that inflation concerns are easing, potentially creating value in long-term U.S. Treasuries. With yields having risen sharply over recent months, buying on the dip could be appealing for investors expecting stabilization or even a reversal in bond yields. Rate cuts traditionally boost bond prices, and if the economy cools in line with Fed expectations, Treasuries could offer strong returns. However, with ongoing inflationary pressures, investors should be cautious of further volatility, especially for long-duration bonds.

Will a Fed Rate Cut Push the S&P 500 Higher?

Morgan Stanley’s outlook, which predicts a potential rally in the S&P 500 to 6000 points, hinges on a mix of post-election optimism and end-of-year FOMO. The anticipated rate cut could add fuel to this momentum, as lower rates are often associated with increased risk-taking and higher valuations for equities. Historically, the S&P 500 has responded favourably to dovish policy shifts, especially if economic data supports a soft-landing narrative. A key factor to watch will be corporate earnings, as an optimistic outlook on profitability can further sustain market gains.

Are You Bullish on the Year-End Rally?

With the Fed’s decision aligning with holiday season optimism, many investors feel bullish about a rally into 2024. Reduced rates can encourage more robust growth expectations, setting the stage for a year-end push. Sectors like tech and financials, which benefit from lower borrowing costs, could lead this charge. However, the broader macro environment—especially with looming uncertainties in the labour market and global economic stability—still suggests a need for cautious optimism.

Trade Ideas for a Rate Cut Scenario

1. $SPDR S&P 500 ETF Trust(SPY)$: Bull Call Spread

Objective: Profit from an expected rally with limited risk.

• Strategy: Buy a call at a lower strike price (e.g., $590) and sell a call at a higher strike price (e.g., $610) for the same expiration.

• Rationale: This reduces the cost of entering a bullish position while benefiting from a controlled uptrend. Set the expiration close to the year-end to capture any rally momentum spurred by the Fed cut.

2. $Microsoft(MSFT)$: Long Call with Protective Put

Objective: Leverage upside potential with downside protection, given high volatility.

• Strategy: Buy an at-the-money call to gain upside exposure, and hedge with an out-of-the-money put.

• Rationale: MSFT is expected to benefit from tech sector growth and AI adoption. The protective put guards against potential market shocks, making this a conservative yet growth-oriented play.

3. Treasury Strategy: Covered Call on $iShares 20+ Year Treasury Bond ETF(TLT)$

Objective: Generate income from stable prices while holding Treasuries.

• Strategy: Buy TLT shares and sell an out-of-the-money call (e.g., a strike price slightly above the current level).

• Rationale: The call premium provides income, offsetting some downside risk and boosting returns on otherwise low-volatility Treasuries. If TLT remains stable or rises slightly, you retain the premium; if TLT is called away, you still profit from capital gains up to the strike.

The Fed's anticipated rate cut could indeed bolster equities, setting up the S&P 500 for year-end gains while adding value to U.S. Treasuries. For now, a cautiously optimistic approach is likely prudent, positioning for gains with an eye on inflation and growth indicators as 2024 unfolds.