The Rise of Cyclical Stocks: Capturing Opportunities in a Tumultuous Market

Currently, the high volatility in the U.S. stock market is expected to persist, highlighting the resilience of the "cash cow" investment style. In the context of "expansive fiscal policy + loose monetary policy," the economy is anticipated to recover, and trading styles are converging further toward cyclicals. Over the past few months, the U.S. Cash Cow Index has risen against the trend during periods of high volatility, while cyclical sectors have clearly taken over from technology stocks, demonstrating strong investment value.

As of September 20, 2023, the volatility index (VIX) of the S&P 500 has exceeded 20% over the past three months, reflecting the uncertainty in market sentiment. In this environment, the Cash Cow Index has shown relatively stable performance, indicating its strong resilience. For example, in the first half of 2023, the U.S. Cash Cow Index (COWZ) accumulated a gain of 12.7%, while the S&P 500 Index only rose by 9.3% during the same period. This indicates that cash cow companies can maintain relatively stable returns even during heightened market volatility.

Since July 2024, U.S. tech stocks have experienced a significant pullback, with the Nasdaq Index retreating 3.75% as of September 20, underperforming the S&P 500's 4.9% decline. Meanwhile, the U.S. Cash Cow Index (COWZ) achieved a positive return of 6.6%, showcasing the resilience of cash cow companies in a volatile market. Additionally, typical cyclical sectors such as industrials, materials, real estate, and financials recorded returns of 8.9%, 6.1%, 14.9%, and 8.5%, respectively. These figures suggest that in the current market environment, both "cash cow" and cyclical styles demonstrate greater advantages.

In terms of policy context, the renewed emphasis on fiscal policy combined with potential interest rate cuts has deepened investors' preference for these styles. According to data from the U.S. Treasury, the fiscal deficit in 2023 is projected to reach $1.4 trillion, with a deficit rate of 7%. This high level of fiscal spending will provide ongoing support for the economy and further promote investment in cyclical assets.

As the Federal Reserve officially enters a rate-cutting cycle, the market's focus will gradually shift from liquidity to profitability. In September, the Fed unexpectedly cut rates by 50 basis points and may continue to lower rates in the future to address the risk of economic slowdown. According to Bloomberg data, the market expects the Federal Funds Rate to fall below 4.5% by the end of 2024, further reducing financing costs.

Supported by resilient U.S. demand, the rate cuts are expected to drive economic recovery and enhance the performance of cyclical assets. We anticipate that inflation and long-term interest rates may return to an upward trend over the next couple of quarters, benefiting cyclical and value stocks. First, the rate cuts will provide more support for the real economy, fostering improvements in U.S. corporate profits. According to Morgan Stanley's forecast, U.S. corporate earnings are expected to grow by about 8% in 2024, providing a solid earnings foundation for cyclical sectors.

Additionally, the ten-year U.S. Treasury yield is expected to remain volatile after the rate cuts and gradually rise due to economic recovery and the base effect of inflation. Data from CME Group indicates that market expectations for future rate hikes are diminishing, further supporting the upward movement of bond yields.

In summary, the "cash cow + cyclical" investment style remains dominant in the future market environment. Investors should pay attention to the dynamics of cyclical sectors and consider incorporating cash cow companies into their portfolios to achieve stable returns amid market volatility. This strategic allocation will enable investors to better navigate market uncertainties while seizing potential investment opportunities. The stable cash flows and risk resilience of cash cow companies make them a preferred choice for investors during periods of high volatility.