Rate Cut Cycle Playbook

Objective: Position your portfolio across three phases — before, during, and after the start of a Fed rate cut cycle — to capture alpha from sector rotations, multiple expansion, and liquidity shifts.

Core Thesis

Fed Rate Cuts → Lower cost of capital + Easing financial conditions → Rotation into growth, small caps, cyclicals, and rate-sensitive assets.

Three-Phase Framework

Phase	Timing	Market Behavior	Trading Action
Pre-Cut Positioning	0-3 months before first cut	Markets begin pricing in cuts; bond yields fall; growth assets bottom	Start accumulating rate-sensitive stocks
Cut & Confirmation	0–2 months after first cut	First cut triggers sector rotation; volatility spikes	Add to positions selectively
Post-Cut Drift	3–12 months after first cut	Risk-on rally, improving macro; earnings and liquidity drive upside	Ride trend, begin risk management beyond 6–9 months

What to Buy (and Why)

1. Small Caps (IWM, IJR, or individual names)

Why: Most rate-sensitive due to high debt/financing needs. Historically outperform 6–12 months after rate cuts.
Buy Timing: Begin accumulating 2–3 months before expected cut.
Exit: 9–15 months after first cut or if macro deteriorates.

2. Homebuilders + Real Estate (ITB, XHB, LEN, DHI, AVB)

Why: Mortgage rates fall → housing demand revives → earnings rebound.
Buy Timing: 1–2 months before expected cut; accelerate if mortgage rates fall sharply.
Exit: 6–9 months post-cut, or earlier if long rates reverse upward.

3. High-Growth Tech (long-duration names)

ETFs: ARKK, WCLD, IGV
Stocks: SNOW, SHOP, CRWD, NET, DDOG
Why: Valuations highly sensitive to discount rates; benefit from liquidity tailwinds.
Buy Timing: Gradual build-up starting ~3 months before cut; add during volatility 1–2 months after.
Exit: Start trimming after 9 months post-cut or if Fed signals pause in easing.

4. Banks (esp. Regionals)

Why: Steepening curve improves net interest margin; easing boosts credit conditions.
ETFs: KRE (regionals), XLF (broad financials)
Buy Timing: Wait for confirmation of curve steepening (0–3 months after first cut).
Exit: If credit risk rises, or Fed ends cutting cycle.

5. Industrials + Materials

Why: Cyclicals outperform in early easing; benefit from infrastructure, capex, and global demand recovery.
Stocks: CAT, DE, HON, FCX, NUE
Buy Timing: Begin 1–2 months before cut, hold into 6–12 months post-cut.
Exit: If global growth slows or Fed pivots to hawkish tone again.

What to Avoid or Trim

Defensives (Utilities, Staples, Healthcare)
These underperform as investors rotate into risk.
- ETFs: XLU, XLP, XLV
Ultra-long duration Treasuries (e.g., TLT)
Sensitive to inflation surprises, even in cutting cycles.

Tactical Rotations (Optional Layer)

If inflation expectations rise post-cut → rotate into commodities (XME, XLE), EM equities (EEM), or TIPS.
If recession risks rise late in cycle → rotate into defensives or high-quality large caps.
If Fed signals pause → begin de-risking growth-heavy exposures.

Sample Allocation (Aggressive Risk-On Tilt)

Asset Class	% Allocation
Small Caps	25%
Growth Tech	25%
Housing / REITs	15%
Banks / Financials	15%
Industrials / Materials	10%
Cash / Options / Hedges	10%

Apply this around 1 month before the first cut and adapt quarterly.

Relative Timing Summary

Phase	Time Window	Action
Build Positions	~3 to 0 months before first cut	Accumulate small caps, housing, long-duration tech
React to First Cut	0 to +2 months	Add selectively on volatility; rotate into banks
Ride the Trend	+3 to +9 months	Stay long cyclicals and growth
De-Risk	+9 to +15 months	Begin trimming, rotate into defensives if needed

Key Indicators to Watch

Yield Curve Steepening (10Y–2Y)
Fed Funds Futures (pricing of future cuts)
ISM Manufacturing PMI → growth signal
Earnings Revisions → confirms macro response

Optional: Option Strategies

Call Spreads: IWM, XHB, ARKK (3–6 months tenor)
Put Protection: SPY, QQQ for portfolio hedging
Risk Reversals: Sell puts to fund calls in high-conviction sectors