Markets are going to go through some trauma.
That was the big takeaway from Michael Hartness, chief investment strategist at Bank of America Merrill Lynch Global Research, at a conference held by finance journal Grant’s Interest Rate Observer in New York on Tuesday.
A concern, he said, is that government spending is high, while monetary policy is likely to become more accommodative. U.S. government spending is 44% of gross domestic product, he said, below the level during the Covid-19 pandemic but more or less in line with those seen during the 2008-2009 financial crisis. And spending is likely to remain elevated because 2024 is a critical election year, while the Federal Reserve will feel intense pressure to cut interest rates, he said.
Taken together, it means “I want to be in real assets over financial assets,” he said. Real assets—investments such as precious metals, real estate, and infrastructure—tend to perform best when inflation picks up.
BofA
has predicted a recession next year. Hartness advised buying international and value stocks and suggested that investors should consider selling the so-called Magnificent Seven group of technology stocks, which includes
Nvidia
(NVDA),
Apple
(AAPL), and others that have surged partly due to the promise of artificial intelligence. Stock prices for that group don’t reflect the chances of an economic downturn, so they could take a hit if a recession appears more likely, he said.
Together, the seven stocks had accounted for three-fourths of the
S&P 500’s
gains as of mid year, according to a note from Research Affiliates’ Rob Arnott last month.
Oil “is about to get slaughtered” and the dollar is going to get hit, Hartnett said. A recession would hurt demand for oil, whose price has pushed higher in recent weeks, while the dollar has gained from the Fed’s tight monetary policy.
Write to Karishma Vanjani at [email protected].
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