By Steve Goldstein
It’s time to bet against the winners from the Federal Reserve’s unprecedented monetary easing during the pandemic, a top Bank of America strategist.
Michael Hartnett, chief investment strategist at Bank of America, said the Fed will be very hawkish the next nine months after inflation soared, reaching 7% in December.
That means, “short the winners of Fed’s liquidity supernova…tech, IG, private equity.” The Fed has taken its balance sheet to nearly $9 trillion, and other central banks, as a percentage of their GDP, have been even more aggressive.
Investors already have started to punish the winners from low interest rates. The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.88% retreated 2.5% on Thursday after officials including Fed Gov. Christopher Waller discussed making as many as five increases in 2022. The ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK -0.59% , a proxy for futuristic but largely unprofitable companies, has dropped 47% from its February highs.
Investment-grade bonds, and private-equity, are less talked about during the current worries over likely Fed interest rate hikes this year.
The iShares iBoxx $ Investment Grade Corporate Bond ETF /zigman2/quotes/206919681/composite LQD -0.43% has slipped 2% this year and is down 5% from its August highs.
The Invesco Global Listed Private Equity ETF /zigman2/quotes/207421552/composite PSP +1.74% has dropped 2% this year and 9% from its highs in November.
Hartnett said the interest rate shock will be global this year. The G7 unemployment rate is near a 40-year low of 4.5%, and the price of the Austrian 100-year bond has tumbled.
In terms of what he recommends on the long side, Hartnett said high quality, defensive stocks should benefit on tighter financial conditions; oil, energy, and other so-called real assets should gain due to inflation; European and emerging market banks may do well as economies recover; and distressed Asian credit may offer opportunities.
One other note he made was that the U.S. dollar /zigman2/quotes/210598269/delayed DXY -0.80% was fading despite increasingly hawkish Fed monetary policy. He said that’s because global investors are losing their faith in the U.S. recovery. Rising yields and a weak dollar is reminiscent of the 1970s, when cash and commodities outperformed stocks and bonds, which is what we’re seeing in 2022, he said.
The dollar has slipped 1% while the yield on the 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +2.07% has climbed 21 basis points this year.