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Why BofA Is Bearish on Markets and Sees ‘Rates Shock’ Coming in '22

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Bank of America Corp. strategists are bearish on markets next year and urged investors to focus on preserving cash as faster inflation and higher interest rates upend the trajectory of global asset prices.

In a note to clients, strategists led by Michael Hartnett listed macro trade recommendations, including long positions on volatility gauges, oil, energy, the U.S. dollar, and real assets. Investors can expect a “rates shock” in 2022, following the “inflation shock” of 2021 and “growth shock” of 2020, they wrote.

“We are therefore bearish and believe capital preservation will grow as a theme in the year ahead,” the bank strategists said.

Their forecast contrasts sharply with bullish views at other Wall Street banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., who see stock markets climbing at a more muted pace next year.

Bloomberg chart on market performance Nov. 22, 2021

Risk assets roared higher on Monday, sending the S&P 500 to a new all-time high, as investors cheered the nomination of Jerome Powell for a second term at the head of the Federal Reserve.

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Bank of America’s strategists cautioned that this is a “most unconventional of cycles” and its end is “highly unlikely to follow a conventional path.” They draw parallels between today’s investment backdrop and the “early stagflation” of the late 1960s and early 70s.

In the bull case for equities, asset prices could keep going higher if the Fed is determined to keep real rates deeply negative, they wrote.

The strategists also reiterated concerns about the risks building in frothy market corners. “The-mother-of-all bubbles in crypto & tech remains a ‘fat tail,’” they said.

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