Investment Newsletter – October 2024
Bank of America’s Michael Hartnett observes that Trump’s recent election success was powered by voters prioritizing inflation concerns over low unemployment rates. Conventional market views now project Trump’s proposed fiscal policies of $8 trillion in tax cuts, $3 trillion from tariffs, and $1 trillion in spending reductions, could spark an inflationary boom, leading to a bearish outlook on bonds. However, contrarians like Hartnett argue that Trump’s focus on lowering living costs aligns with the Fed’s policy goals, suggesting inflation could remain moderated.
The market is largely endorsing the “conventional” inflation narrative, evidenced by the surge in 2-year inflation breakeven, up 100 basis points over the past two months. Meanwhile, price gains in high-leverage and long-duration sectors such as private equity, consumer discretionary, biotech, and speculative tech, indicate that Wall Street may be pricing in a peak in bond yields and the dollar . Yet, these movements also hint at potential mixed market outcomes.
Hartnett expands on the typical expectations for Trump’s economic approach, which includes tariffs and immigration controls, tax cuts, and ultimately, a “US inflationary boom” combined with a “global deflationary bust. ” In this scenario, the recommended plays would be a bullish stance on gold, the US dollar, and domestic stocks (particularly Nasdaq and Russell 2000) while favouring US stocks over international equities, and going short on US Treasuries. Hartnett also highlights the “risk-on” investment window from the election through Inauguration Day.
Building on recent contrarian perspectives, Hartnett suggests several strategic moves for investors if risk assets enter a melt-up phase:
• Reduce Exposure as Conditions Tighten: If real 10-year rates exceed 2.5%, 30-year rates rise above 5%, or 2-year rates surpass 4.5%, Hartnett advises trimming risk assets due to tighter financial conditions.
• Buy Treasuries on Yield Rise to 5%: Should yields reach 5%, Hartnett anticipates the Fed will convey its commitment to curbing inflation without rate cuts in 2025. He speculates that a new administration might temper tariffs and implement spending cuts, even potentially tapping into the $35 trillion of home equity to manage the national debt, which could suggest a deficit peak in 2025.
• Target “Leverage” & “Long Duration” Sectors: Trump’s policy mix on balancing inflationary pressures from tariffs and tax cuts with disinflationary elements like deficit control and deregulation could stabilize Treasury markets. This would favour sectors like REITs, small-cap stocks, banks, and biotech.
• Invest in International Markets (China, Europe): With anticipated fiscal easing in China and aggressive ECB rate cuts in response to “America First” tariffs, financial conditions in Asia and Europe may improve relative to the US. Lower rates, favourable currencies, and declining oil prices could create attractive opportunities in sectors such as Chinese internet companies, European cyclicals, and emerging markets well-positioned for deglobalization, like Mexican equities.
