Stocks fell slightly last week. Moves up and down were driven by inflation data releases (higher inflation = stocks down, lower inflation = stocks up).
Bank of America chief investment strategist Michael Hartnett published an interesting note last week fleshing out his secular (10 year), cyclical (1 year), and tactical (1 month) market views.
In Hartnett’s view, the 2020s will be a challenging decade for stocks. Higher inflation and interest rates will lower valuations, taxes will go up, politics will become more populist, and geopolitical risks will cast a constant shadow over markets.
Hartnett believes that cash, real assets ($XLRE, $BIP (Brookfield Infrastructure Partners LP)) and small cap stocks ($IWM) will outperform bonds ($TLT) and Technology stocks ($XLK) over the decade.
Moving to the cyclical time frame, Hartnett is bearish on stocks for H2 22. Higher interest rates will slow down the economy, possibly leading to a hard landing and a recession, while earnings estimates are still too optimistic and should be revised downwards.
Hartnett has an end-2022 target of 3600 for the S&P 500 index ($SPX500). He views 3300 as a good level to start buying. If the index reaches 3000, investors should buy aggressively, in his view.
Tactically, Hartnett is more positive. Sentiment is poor, and a shallow recession is already priced in. Thus, there may well be a summer rally in July and August. This prediction is supported by last week’s trading, which showed that bad inflation numbers cannot scare the market any more.
What happens after August is more uncertain. Hartnett hopes for a big plunge in Q3, which would create a good buying opportunity in the September-November time frame.
Another scenario is 3-6 months of range-bound trading, like happened in 1973, before a second 33% drop in 1974 took stocks to their final low of the 1973-74 bear market.
Our view is that more bad news (not just inflation) will need to emerge before markets fall more, so this bear market may prove to be a protracted 2-year affair, with the final low set only in mid-to-late 2023.
Supporting our cautious view, some models indicate that the stock market is 40% overvalued,
while economic momentum remains extremely negative.
Thus, we continue to prefer cash to stocks, although we expect range-bound trading with an upside bias in the near term.
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