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- Bank of America’s Michael Hartnett has been one of Wall Street’s biggest bears over the past year.
- But in a Friday note, Hartnett outlined the potential factors that could move him from bearish to bullish.
- While Hartnett isn’t holding his breath, here’s what he needs to see to accelerate shares.
High inflation, a weak consumer, and the threat of an economic recession are all factors that have shaped the bearish outlook of Michael Hartnett, chief investment strategist at Bank of America.
But in a Friday note, Hartnett highlighted what he needs to see to change his view and become more bullish on the stock market.
For the year ahead, Hartnett has asked investors to fade the S&P 500 as it approaches 4,200 on the idea that the current environment is a “peak Goldilocks” moment after a strong January jobs report. In other words, the macro data should only get worse from here on out.
Hartnett wrote on Friday, “Secular inflation + end of the era of QE + end of the era of US buybacks + our expectation of a ‘no landing’ in H1’23 leads to a ‘hard landing’ in H2’23 … It puts us in a recession.” ,
Because of this outlook, Hartnett has told investors not to buy shares unless the S&P 500 is down at least 12% from current levels.
“Nibble at S&P 3,600, bite at 3,300, gorge at 3,000,” Hartnett has consistently advised, which would represent a sell-off of up to 26% from current levels in the S&P 500 and a new cycle low in the current bear market. ,
But Hartnett acknowledged that his bearish outlook on the stock market could fizzle out if wage inflation can stabilize before the economy experiences a hard landing, aka a painful recession.
The thinking is that if wage inflation subsides, it will give the Federal Reserve the green light to end its interest rate hikes and even consider cutting interest rates, since wage inflation is expected to reduce overall inflation. Seen as the primary drive of inflation.
This could be an almost perfect scenario for investors because lower interest rates could help stimulate the economy enough that it avoids a full-blown recession.
And even if a recession does strike, Hartnett believes the bulls have something the bears will never have: scared policymakers.
“Everyone expects the Fed to cut and politicians panic through more stimulus checks, rebates, loan forgiveness, the first tremors of a recession,” Hartnett said.
Another factor that could help the stock market outperform what Hartnett currently expects is the long lag between interest rate hikes by the Fed and increases that negatively impact the economy.
“The gap in the economy from easy monetary policy was immediate in 2020. The gap from tight monetary policy has been much longer over the past 12 months,” Hartnett said.
The one-year anniversary of the Fed’s first rate hike approaches this March, and two more 25 basis point rate hikes are still expected by the market. But if the economy can continue to hold itself together and stave off recession, Hartnett may want to consider taking a more creative approach toward stocks.
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