Investment Newsletter – March 2024
A rare rally in both US tech stocks and commodities, combined with a jump in bond yields, has echoes of periods when bubbles are forming, according to strategists at Bank of America Corp. The unusual price moves are consistent with bets that interest rates will stay higher for longer while economic growth remains strong, a so-called no-landing scenario. But while that narrative is “correctly in vogue,” there’s also a risk of higher inflation and an increased cost of capital, the strategists led by Michael Hartnett wrote.
The price action is “typical of bubbly markets,” according to Hartnett, who makes a comparison with the pre- tech bubble period of 1999. Current conditions imply investors should sell bonds and the US dollar, and buy Nasdaq shares and inflation hedges such as gold, commodities and crypto, the strategists write.
Equity markets have remained resilient in recent weeks despite a hawkish turn from Federal Reserve officials. Bond markets are now pricing between one and two rate cuts by the end of the year, compared with six just three months ago, yet both the S&P 500 and the Nasdaq 100 are still hovering near record highs. The Bank of America strategists say there’s a risk that a no-landing scenario will turn into a hard-landing scenario. That would mean monetary tightening resumes and contagion spreads from financial difficulties at regional banks and the real estate sector, according to the note.
As BBG’s Garfield Reynolds noted, the previous two times when gold hit record highs were times of negative real yields during the pandemic and in 2011-12 as Europe’s sovereign debt woes followed on the heels of the global financial crisis. Back before the introduction of TIPS allowed the ready tracking of market expectations for real rates, the precious metal’s ascent to a record in 1980 came when 10-year nominal yields were well below the inflation rate. “That makes gold’s rally this year vulnerable, though it may also signal investors are becoming worried that major turmoil is coming”, according to Reynolds, who notes that the surge that peaked in 2011 blew past gold’s 1980 high at the start of 2008, well before the collapse of Lehman Brothers. Not surprisingly, this unprecedented disconnect, is also the topic under consideration in weekly Flow Show note by BofA’s CIO Michael Hartnett, who likewise looks at the broken relationship between gold and real rates.
Following a robust rebound in the Chinese market, the current landscape presents a nuanced decision point for investors. Historically, prudent market strategy often suggests exiting long positions after a significant bounce, especially when key indicators such as the 200-day moving average have yet to confirm a sustained bullish trend with a positive slope. However, despite this traditional metric not being met, our analysis leads us to maintain a bullish stance on China. We acknowledge the view that might label our approach as overly optimistic or unconventional. Yet, we find the valuation metrics compelling; China remains a markedly under- owned market with considerable potential for positive surprises. Multiple catalysts could drive further upside, outweighing the risks of adverse developments.
