On Tuesday, BofA’s Savita Subramanian made the case for S&P 5,000 in 2024.
Suffice to say the bank’s house call for US equities is bullish.
If you’re wondering whether that means Michael Hartnett is prepared to sound the all-clear, the answer is “no.”
Whereas Subramanian long ago declared the bear market over, Hartnett still writes as though it’s ongoing, even as he never directly contradicts Subramanian. Note that Hartnett’s purview is “a bit” wider: Global investment strategy versus Subramanian’s US equity and quant strategy.
“We don’t think the Wall Street bear ends until Credit, Crude and Consumer threaten hard landing/credit events, triggering bearish Positioning, recessionary Profits and Policy panic,” Hartnett said, in the 2024 year-ahead edition of the “Thundering Word.”
Hartnett’s sequencing thesis is familiar. He’s long contended that until the “3Cs” trigger the “3Ps,” we can’t get bull markets in Bonds, Bullion and Breadth, the “3Bs.”
“Bulls outperformed bears like us in 2023 but we await the classic combo of bearish Positioning, recessionary Profits and Policy easing to flip to ‘full bull,'” Hartnett wrote.
Credit, crude and the consumer “are signalling slower growth,” he went on, citing tighter credit conditions, wider spreads, rising defaults and the “unexpected” bear market in oil.
Of course, Americans haven’t stopped spending. Yet. Hartnett cited job and wealth security for the “bulletproof” consumer, but noted that unemployment is rising. The absence of a recession in 2023 was down to a “lack of redundancies and refinancings,” he wrote.
As for the “3Bs,” Hartnett sees a bull market in bonds, bullion and breadth commencing from H2 2024, as “a weaker US economy and Fed cuts delivers a cyclical decline in bond yields and the dollar,” which would be bullish for gold. Bonds “can easily deliver equity-like returns in 2024,” he said, reiterating another familiar refrain.
Here are Hartnett’s top 10 trades for 2024:
- Long blended 30-year UST/IG/HY/EM bond portfolio. Rationale: High yield + “equity returns without equity risks.”
- Long zero-coupon bonds. Rationale: “Peak yields” + “hard landing” hedge.
- Long IG tech bonds. Rationale: Own tech balance sheets but not tech EPS in ‘24.
- Long EU subordinated debt. Rationale: Big yields and big EU winners on “peak yield” theme.
- Long GCC US$ bonds. Rationale: Strong Saudi/GCC balance sheets + hedge against energy crisis.
- Long Japanese yen. Rationale: BoJ rate hikes to trigger big capital repatriation to Japan.
- Long EM assets. Rationale: “Peak US dollar” play and China can surprise on upside.
- Long equity “diamonds in the rough.” Rationale: Buy best stocks in most unloved levered regions/sectors of banks, utilities, REITs, UK, China.
- Long distressed tech vs Magnificent Seven. Rationale: Lower rates = lower EPS much better for biotech/renewables than crowded monopolistic tech.
- Long ACWX & SPW. Rationale: Risk-return in consensus “soft landing” looks great in equity breadth, small cap, value, international.
Hartnett also sketched the contours of a bull case and a bear case for markets in general.
On the bull side, an “A.I. productivity miracle” could “keep corporate margins high” while geopolitical tensions might ease given Western politicians “need less global tension in a big election year.”
On the bear side, Hartnett reiterated that the next recession could, in theory anyway, “cause higher not lower yields” as markets anticipate a fiscal panic to prevent social unrest.
The existential version of that narrative would be a rekindled, uncontrolled selloff at the long-end of the Treasury curve and a weaker dollar on perceptions of fiscal profligacy, institutional credibility concerns and acute government dysfunction. As Hartnett put it, “D.C.’s ‘deficit deniers’ mean the Fed is trapped — forced to sacrifice policy credibility to bail out the economy and government [with the] introduction of QE/YCC” which could “lead to a collapse in the US dollar.”
Two things: 1) the US dollar isn’t going to “collapse,” 2) If the Fed were to “bail out” the real economy and the government, it might at least be a better use of firepower than bailing out Wall Street for the nth time.
Long ago and far away I studied long and hard so I could teach finance to university students. I’ve even written books and papers on the subject but sadly that was too long ago and Mr. Hartnett’s top ten trades, while intuitive and probably quite possibly potentially profitable are way above my pay grade. I hope some of the people who do this sort of thing will be doing it for my benefit somewhere because I sure as heck can’t really do it by myself.