If the Fed cuts interest rates, it means more money would flow into the economy and find its way to banks, individuals, and corporations (in that order), or so goes the traditional macroeconomic thinking. So why did investors not instantly embrace the news of the Fed cut by immediately plowing into growth assets, and instead flee all asset classes in favor of cash during the first hour after the announcement today?
Perhaps because not everyone in the professional financial community was prepared to take in the 0.25% rate cut the Fed announced – at least not immediately after the news. How these professional investors eventually responded may speak volumes about their upcoming investment strategy.
The major U.S. stock indexes ended the day essentially unchanged, but only after selling off significantly in the first hour after the Fed explained its reason for the cut. Curiously, it wasn't just stocks, but all asset classes sold off during that hour, with the exception of the U.S. dollar (see chart below). U.S. dollar futures rallied notably during the hour, suggesting that in the immediate wake of the announcement Wall Street pros had to regroup and take the measure of the environment they were now in.
This action is significant because it underlines the idea that such professionals didn't have a clear plan in mind already. They had to take stock, so to speak, and come up with a game plan. What these investors did once they had decided on such a plan is worth noting because it may signal the direction money is likely to flow in the days and weeks ahead.
Utility Sector Attracts Buyers Immediately After Sell-Off
The first move following a knee-jerk move to cash was for investors to return to the markets by putting money into the utility sector. It was easy to see by looking at a 15-minute chart of the Utilities Select Sector SPDR® Fund (XLU) shown below. This fund ended the day 0.5% higher, outperforming other asset groups.
The action may be significant to notice because this sector is typically where scared money goes when it is looking for a safe space to hide. If at least some professionals are rushing to safety after the rate cut announcement, it may be a sign that they think the news portends more negative outcomes than positive ones in the days to come.
Dominion Energy Leads Utility Sector
Dominion Energy, Inc. (D) ended up with the best performance on the day among utility sector stocks. It's not too hard to see why by looking at the company's performance over the past 18 months. During the broader market's 20% pullback in the fourth quarter of 2018, Dominion's share price fluctuation was roughly half of that. Meanwhile, the company has been making new highs so far in 2019 while still paying an impressive 4% dividend yield. The combination of higher yield and lower volatility is likely attractive to investors in an environment of uncertainty.
The Bottom Line
Market professionals in general may not have been expecting the Fed's rate-cut announcement. In the immediate aftermath of the news, U.S. dollar futures spiked while all other asset classes fell. One hour later, utility stocks seemed to take the lead on the rebound and ended the day by outperforming other asset groups. Dominion Energy appears to be a leading issue among that group.
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