- Bank of America’s Michael Hartnett was one of the biggest bears on Wall Street last year.
- But in a Friday note, Hartnett outlined potential factors that could turn him from a pessimist to an optimist.
- While Hartnett isn’t holding his breath, here’s what he needs to see to stay bullish on equities.
High inflation, consumer weakness and the threat of an economic recession are factors that shaped the pessimistic view of Bank of America’s chief investment strategist, Michael Hartnett.
But in a Friday note, Hartnett outlined what he needs to see to change his view and become more bullish on the stock market.
For the year ahead, Hartnett told investors to lower the S&P 500 as it nears 4,200, with the view that the current environment is a “golden peak” moment following January’s strong jobs report. In other words, the macro data should only get worse from here.
“Secular inflation + end of QE era + end of US buyback era + our ‘no landing’ expectation in H1 2023 leads to a ‘hard landing’ in H2 ’23…that keeps us pessimistic”, wrote Hartnett on Friday.
Because of that view, Hartnett told investors not to buy stocks until the S&P 500 is down at least 12% from current levels.
“Bite at the S&P 3600, bite at 3300, gorge at 3000,” Hartnett has always advised, which would represent a sell-off in the S&P 500 of up to 26% from current levels and a new bear cycle in the current bear market. .
But Hartnett concedes that his pessimistic view of the stock market could crumble if wage inflation eases before the economy experiences a hard landing, otherwise known as a painful recession.
The thinking is that if wage inflation is brought under control, it would give the Federal Reserve the green light to end its interest rate hikes and even consider cutting interest rates, as wage inflation is seen as the main driver of inflation. general inflation.
This could be an almost perfect scenario for investors, as lower interest rates could help stimulate the economy enough to avoid a recession altogether.
And even if a recession hits, Hartnett admits that bulls have something up their sleeves that pessimists never will: scared policymakers.
“Simply put, everyone expects the Fed to cut and politicians to panic through more stimulus checks, discounting, debt forgiveness at the first sign of a recession,” Hartnett said.
Another factor that may help the stock market perform better than Hartnett currently expects is the long lag between the Fed raising interest rates and increases that negatively impact the economy.
“The lag from easier monetary policy for the economy was instantaneous in 2020. The lag from tighter monetary policy was much, much larger over the last 12 months,” Hartnett said.
The one-year anniversary of the Fed’s first rate hike is approaching in March, and two more 25 basis point hikes are still expected by the market. But if the economy can hold together and avoid a recession, Hartnett may have to consider taking a more constructive view on equities.