Investors ought to modify to buying and selling in the Twilight Zone as Wall Street narratives change faster than a TikTok video, BofA Securities says in its weekly Flow Show observe Friday.
Investors “are in the trickiest half of the funding cycle: tightening ending however easing removed from starting, inflation over however recession not but begun, China reopen vs US recession,” strategist Michael Hartnett wrote in a observe.
Investor conviction continues to be in an enormous bear market and tail dangers to the consensus are excessive, Hartnett added.
In the present situation, he posed three “heretical thoughts”:
- CPI troughs in Q1. Annualized three-month change in CPI is 0% (see chart at backside) whereas markets are bullishly buying and selling two extra quarter-point Fed hikes and 200 bps of cuts over 18 months. A “super-tight labor market (<200k on preliminary claims) + renewed rise (in) commodity costs (China reopen + MAD geopolitics in Russia/Ukraine)” might result in a few higher-than-expected CPI prints that reverse outsized expectations of 200bps of cuts.
- “Mission Accomplished” central banks unwittingly affirm a brand new period of inflation. The anticipated finish of tightening would happen earlier than coverage charges hit restrictive ranges in actual phrases and “hikes ending with all economies at full employment/inflation properly above goal.” Central banks are “quietly accepting larger structural inflation, wittingly or unwittingly (perhaps they assume low charges assist to service authorities debt, larger inflation helps to debase nominal stage of debt, inflation cures wealth inequality).”
- Q2 recession marks a low in bond yields. Last 12 months’s 17% loss in U.S. Treasuries (TBT) (TLT) (SHY) was the worst since 1788 and there has by no means been three-straight years of U.S. authorities bond losses. “250 years of historical past say US Treasury returns up in 2023 … however recession coming and sure a biggie.” Higher U.S. unemployment coinciding with a 2% private financial savings fee, a 15% development in bank card debt, 19% file APR bank card charges at a 50-year excessive and client finance firms growing provision is “no bueno.”
From a cyclical viewpoint, Hartnett nonetheless predicts optimistic Treasury returns this 12 months and a tricky 12 months for shares (NYSEARCA:SPY) (QQQ) (DIA) (IWM), with a tough touchdown and credit score occasions dangers underpriced. For the S&P 500 (SP500) he says nibble at 3,600, chunk at 3,300 and gorge at 3,000.
Looking at secular management there will probably be a shift from deflation belongings to inflation belongings being a conviction trade, like Japan in 1990, the dot-com bust in 2000, U.S. and EU banks in 2007 and BRICs and assets in 2011, he added.
Tech (XLK) and FAANG (META) (AAPL) (AMZN) (NFLX) (GOOG) (GOOGL) will underperform in the coming years and the new management will probably be inflation belongings like commodities, non-U.S. shares, small-cap over large-cap and worth (IWD) over development (IWF), Harnett stated.
Check out Credit Suisse’s record of 10 surprises if they’re improper about 2023.