Frank Zhao, the global market strategist for the Asia-Pacific region (excluding Japan) at Invesco, stated that Federal Reserve Chairman Powell delivered an economic policy speech at the Jackson Hole central bank annual meeting, indicating that "the time for policy adjustment has come." The recent rise in the US stock market may reflect investors' views that a cut in interest rates will boost stocks. He also mentioned that it is uncertain whether the Fed's first rate cut in September will lead to a comprehensive rebound in the stock market, and it may be more reasonable to favor fixed income over stocks in this situation. The upside potential for the US stock market from rate cuts may be limited Looking back at when the Federal Reserve started raising interest rates in 2022, US stocks declined as bond yields rose. Conversely, will the market rise when the Fed starts cutting rates? The answer may be no, as the starting points for relative valuations are different. In 2022, based on relative risk-adjusted benchmarks, US stocks were more expensive than US bonds. Zhao stated that with the recent rise in stocks, the current situation is very different. Valuations of US stocks seem to have reached fair value already, so there may not be much upside potential from rate cuts. Therefore, he believes that the Fed needs to cut rates more quickly and significantly in order to push bond yields to unfavorable levels, thereby significantly benefiting stocks from the rate cuts. The biggest risk faced by the market in the next 12 months is whether the US economy will experience a "hard landing." He mentioned that growth is still below trend, and the labor market reflects deepening cracks in the economy. Despite the market largely ignoring these developments, negative economic factors are intensifying. The US Department of Labor recently revised down non-farm payroll data, the second-largest negative revision on record. Leading indicators show that the US economy continues to slow down. He believes that investors should increase defensive positions, and favoring fixed income over stocks may be a reasonable move. Favoring fixed income Based on valuations and risk-adjusted benchmarks, US stock valuations seem overpriced, so extending portfolio duration and credit allocations may be more reasonable, especially as the Fed begins a rate-cutting cycle. Furthermore, the US election is approaching. Looking at the past seven election cycles, regardless of the election results, all credit sectors in the US have shown strong one-year returns after the election. As the current polling results are neck and neck, the outcome is still uncertain. There could be a "Trump 2.0" era in the future, which may introduce economic and geopolitical uncertainties, weakening risk appetite. Zhao stated that the macro conditions in the US fixed income market are mature: the Fed is about to cut rates, US recession risks are increasing, and the US election brings uncertain factors. Therefore, he supports deploying bonds of different durations based on strong arguments. As the Fed is about to cut rates, short-term Treasury yields may fall, and long-term yields may also decline due to recession fears. Investors can also allocate to investment-grade and high-yield bonds to take advantage of the attractive yield environment while strengthening defensive positions in the uncertain US macro and political environment. Investment risk Investment value and any income will fluctuate (partly as a result of exchange rate fluctuations), and investors may not be able to recover the full investment amount.