It’s that time of the year – that glorious couple of weeks when Wall Street’s best and brightest flood clients with voluminous year-ahead outlook notes, some of which will be skimmed, many of which will be relegated to the “I’ll read this over the Christmas holiday” folder and most of which will be marked “unread” in inboxes, an implicit promise on the part of the recipient that has virtually no chance of being kept.
But BofAML’s Michael Hartnett is probably an exception to the “nobody reads these things” rule. Hartnett’s style is engaging, but more importantly at a time when analysts are competing for attention, Hartnett’s notes are short – written almost in tweet form, with segues denoted by “…” and bullet points used with reckless abandon.
You might recognize Hartnett’s name. Here, for those who need a refresher, is the backstory from 2018, as excerpted from our previous posts documenting Michael’s calls:
It was Hartnett, you’re reminded, who on January 26 told folks that his proprietary “Bull & Bear Indicator” had just flashed a sell signal and in case you were prone to being skeptical of that indicator, he reminded you that if backtests are any guide, it’s infallible. Here’s the key excerpt from that late January note:
BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; average equity peak-to-trough drop following 3 months = 12%; note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016.
That, just days after his Global Fund Manager Survey flagged “short vol.” as the most crowded trade on the planet.
That was all looking pretty prescient two weeks later, after global equities careened into correction territory and the short VIX ETPs blew up, leading the Seth Golden crowd to ponder the depressing prospect of going back to a life spent making the cigarette break schedules at the local Target.
Subsequently, Hartnett would warn that “long FAANG” had replaced “short vol.” as the most crowded trade on Earth (primarily because the short VIX ETP massacre cleared the deck). That too proved prescient as tech would promptly stumble on regulatory concerns in late March.
With that as the context, Hartnett is out on Sunday with his 2019 outlook and it is, true to form, short and to the point. Here is the title:
“The ‘Baby Bear’ market on Wall St that began in 2018’Q1 is not yet over [and] we believe asset prices will find their low once rate expectations peak and EPS expectations trough”, he begins, before telling you exactly what to watch for when it comes to identifying “The Big Low” as follows:
“The Big Low” occurs with a low in positioning and profit expectations, and policy stimulus (China, trade, fiscal, peak Fed tightening); a rally in EM currencies, the KOSPI, copper, global industrial stocks would confirm China/global EPS expectations at a trough; a rally in REITs, homebuilders & semiconductor stocks would confirm Fed rate expectations peaking.
Until that point, Hartnett is “bearish stocks, bearish bonds, bullish commodities, bullish cash and bearish the US dollar.” He says he “expects to turn tactically risk-on in late-spring.”
As you might surmise from that, Hartnett thinks the turning point will likely come sometime in Q2, which is what informs the title of the opening section of his note: “Buy in May.” Here are his 9 trades for ’19:
(BofAML, detailed breakdown below)
Those calls, Hartnett says, “reflect a V-shaped trajectory for credit and equity prices next year.”
What could go wrong with the “V-shaped” call? Well, the bear market on Wall Street could spillover into Main Street, for one thing.
But in addition to that, Hartnett says you should be worried if ongoing easing in China “fails to stimulate China & Asian growth leading to a ‘liquidity trap’ and China devaluation fears [which] would reduce global GDP forecasts.”
Oh, and he also flags the risk that the bond vigilantes make an appearance, pushing up rates and raising the specter of stagflation.
That, believe it or not, is the long and the short of it (figuratively and literally in this case). As alluded to above, Hartnett seems to understand that one way to make sure his 2019 outlook pieces don’t get relegated to “mark unread” purgatory is to get straight to the point.