In a recent forecast that doesn't mince words, BofA Securities' investment strategist Michael Hartnett predicts a significant shift in the financial markets for the final part of 2023 and in 2024. He points towards a trio of winners: bonds, bullion, and market breadth, signaling a reversal in trend from 2023.
The key to understanding those three "Bs" is understanding the "3Ps" and "3Cs" Hartnett's approach, which he dubs the "3Ps", encapsulates a combination of bearish positioning, recessionary profits, and policy easing.
While acknowledging that bulls outperformed bears in 2023, Hartnett suggests a readiness to shift to a 'full bull' stance, contingent on these factors aligning. He warns of a higher-than-expected risk of a 'hard landing' for the economy.
He sees a 'soft landing' scenario which chould see bond yields falling from 5% to 4% while a 'hard landing' might plunge yields deeper, from 4% to 3%, indicating bearish risk for broader risk trades.
Additionally, Hartnett emphasizes the "3Cs": Credit, Crude, and Consumer. He observes a tightening in credit, rising spreads and defaults, and an unexpected bear market in oil. Although the US consumer has remained resilient, increasing unemployment poses a new challenge. These factors, according to Hartnett, will lead to a softer economy.
Overall, he sees the Rise of the "3Bs": Bonds, Bullion, and Breadth. Looking ahead, Hartnett predicts that the second half of 2023 will herald bull markets in bonds, bullion, and breadth. A weaker USeconomy and Federal Reserve cuts are expected to drive down bond yields and the US dollar, which he believes will positively impact gold. He suggests that bonds could offer equity-like returns in 2024.
Nibbling at 'Hard Landing' Plays Hartnett advises investors to consider 'hard landing' plays at the onset of recession. Areas to focus on include Real Estate Investment Trusts (REITs), banks, retail, utilities, staples, small cap, and China. Decoding 'Breadth' Of Hartnett's predictions, market breadth may be the least intuitive. In this context, 'breadth' refers to a broader range of stocks driving equity index returns, moving beyond the dominance of the magnificent seven tech stocks.
