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This one sector could be the best hedge for the Fed's next move

Invest in this one sector after the Fed, strategist says

It's Fed day and markets are going all in on a rate cut Wednesday afternoon.

The path forward looks more uncertain, though, and all eyes will be on Federal Reserve Chair Jerome Powell at his post-meeting news conference.

"They're going to do that first rate cut then look to see for the future where they can cut again depending on how things shake out," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said Tuesday on CNBC's "Trading Nation." "They're looking to do this insurance cut in order to get ahead of potential trade weakness."

The key to how the market reacts is how it teases its next move, said Zaccarelli. That could fall into two camps: the Fed could assure markets this was merely a preemptive cut, fueling confidence in the economy, or it could signal more moves to come which could raise recession fears.

"If the Fed is really cutting rates in advance of what could be some weakness in the economy coming forward, then typically people will go to utilities and consumer staples," he said. "Unfortunately, right now, both of those sectors are pretty expensive."

Defensive sectors, such as utilities, staples and real estate investment trusts (REITs), typically get a bid as a safety trade when investors foresee an economic slowdown. REITs and staples, in particular, have outperformed in the past three months and pushed valuations higher.

"What we're looking at doing is going into health care, which is also a defensive sector. It's much cheaper than those other sectors I mentioned," said Zaccarelli.

Health care, the worst-performing sector this year, trades at 15 times forward earnings, below the 17 times multiple on the S&P 500. By comparison, staples, utilities and REITs trade closer to 20 times earnings.

The sector also offers a dual bet on whichever way the Fed next moves, he adds.

"Within in health care, you really can have an opportunity for both growth as well as defensive subindustries, subsectors. Looking at biotechnology, that's really the growth area of health care," said Zaccarelli. "Meanwhile, if you look at medical device manufacturers and services companies within health care, it's growing at a slower rate, around mid-single-digits growth, but it provides much more defensive characteristics."

The IBB biotechnology ETF has surged more than 1% in the past week, though trailed the market this year. The IHI medical devices ETF, on the other hand, is essentially flat this week, but up 25% in 2019.

This one sector could be the best hedge for the Fed's next move