Bank of America isn’t convinced the recent stock market rally can last, and instead thinks investors are better off selling into any upside while uncertainty persists.
“Sell hubris, buy humiliation,” is the advice from the bank’s chief investment strategist, Michael Hartnett.
“We remain [first-half] buyers of dips in bonds, international & gold, sellers of SPX/US$ rallies,” he and his team wrote Thursday, adding that the market’s “pain trade” suggests more downside ahead.
The outlook comes amid this week’s positive momentum for the S&P 500. The benchmark index is up 7.3% from a Monday low, surging on signs that Washington’s trade war with China could finally ease.
But a durable rally can’t happen unless three specific developments materialize, Hartnett outlined.
First, the US must reach a trade deal, one that would reduce the tariff rate on Chinese exports below 60%.
That’s the rate floated by President Donald Trump during his campaign, but so far duties have been much higher. Aggressive tit-for-tat trade tensions have pumped the Chinese tariff rate to 145%, which Beijing met with its own steep tariffs on US goods.
Trump has finally signaled that trade talks are underway to ease the conflict, though Beijing has flatly denied that discussions have taken place. In a recent note, Deutsche Bank warned that the longer it takes to achieve a tariff unwind, the worse the repercussions for the US economy.
Second, the Federal Reserve must help push US Treasury yields lower by cutting interest rates.
April’s tariff drama sent shockwaves through the bond market, sending benchmark yields higher.
Fedspeak indicating its support for the market could help deliver lower yields, which would further dissipate if interest rates were reduced. Comments from Fed officials this week hinted at a readiness to cut rates in the summer if economic data weakens. As of Friday afternoon, investors indicate they see a 60% chance the Fed cuts rates by 25 basis points at its June meeting.
Third, consumers must remain resilient.
So far, Hartnett continues to see solid spending, possibly due to the enduring strength of the labor market. For now, this has lowered expectations of a US consumer recession driven by declining equity wealth among higher-income households and mounting inflation angst.
