Enjoy 2019 while it lasts, we’re in for a painful 2020.
A new report from Bank of America (NYSE: BAC) solidifies the bank’s bullish stance for the rest of this year. But the firm warns investors to enjoy 2019 while it lasts, because the party ends next year.
According to the bank’s analysts, risk assets are poised to rally through the end of 2019 as “bearish positioning and bullish monetary policy” outpace slowing macroeconomic growth.
“We are bullish on stocks, bearish bonds, bullish commodities… and bearish the U.S. dollar,” wrote Bank of America strategist Michael Hartnett in a note from Wednesday. Despite the trade war heating up over the last month, returns on equities, bonds, and commodities have been strong, the strategist noted.
But in 2020, recession fears, “policy impotence,” and a growing bubble in the bond market risk a ceiling for credit and equities. A situation the strategist is calling a “big top.”
“We are bearish on risk assets in 2020 as recession / policy impotence / bond bubble risks induce Big Top in credit and equities,” Hartnett wrote in the note. In other words, lower rates and tax cuts may have limited impact in preventing a recession and keeping the bull market going as the trade war continues to beat down business confidence and investments.
Hartnett also noted that the most contrarian trade in the next 10 years is “long inflation,” a big change from the last 10 years.
According to Hartnett and his team, the 2020s “will begin with the lowest interest rates in 5,000 years.” Yes, rates were higher than they are today back in 3000 B.C. during the Bronze Age.
“The 2020s are likely to witness a more forceful attempt to create inflation,” Hartnett wrote. “Even the slightest sign of success will lead to dramatic rotation… away from the deflationary winners of the 2010s to the inflationary losers.”
Low rates illustrate the fragility of the global economy and the potential for pain ahead in the stock market. Hartnett sees a “coming bust” in fixed income that will lead to “extreme pain on Wall Street,” which will ultimately spread to the broader economy.
There’s a growing concern that the Fed and global central banks have run out of policy tools to prevent a recession. And a jump in rate volatility—like the rapid shifts in the 10-year Treasury yield, for example—could signal the end of a decade-long bullish environment of low rates that fueled maximum corporate profits.
Hartnett doesn’t believe asset prices will peak right away: “The moment of error and impotence has yet to arrive,” he said. Hartnett also noted that bearish investor sentiment is so high right now that it has triggered a strong contrarian buy signal for the first time since January 2019.
For now, Harnett says to buy foreign stocks, especially those listed in Hong Kong, South Korea, and Germany, along with European banks, emerging market currencies, and low-rated junk bonds.