Bank of America's top global strategist warns of growing bubble risk in the stock market as the economy heads for a no-landing scenario — and shares 3 charts showing the market could be headed for trouble (2024)
Michael Hartnett, Bank of America's top global strategist, thinks a no-landing scenario is the most-likely outcome for the US economy in the months ahead. That means the labor market would remain strong, but inflation would also stay above the Federal Reserve's long-term goal of 2%.
While that's fine for now, Hartnett warns it's a path that eventually leads to trouble for the economy and stocks. The longer inflation stays elevated, the longer the Fed has to keep policy restrictive or even tighten further, putting the economy at risk of a recession as businesses and consumers slow borrowing and spending.
"We say rising no landing risks = rising hard landing risks," Hartnett said in an April 11 note. "Monetary tightening resumes (markets now pricing in 15% probability of Fed hike) & contagion risks form from REITs, regional banks, small cap up."
By many measures, the US economy looks strong. The unemployment rate is at a historically low 3.8% and monthly job growth is steady. Consumer spending, which makes up about two-thirds of the US economy, is also still robust. Household balance sheets are strong, too, with home values at all-time highs and stocks hovering just off of record levels.
But some cracks are beginning to show. Delinquencies on credit card and auto loans are rising, as are layoff announcements. As Hartnett pointed out, small-business optimism is poor, with hiring plans among them at eight-year lows. This is concerning because small businesses make up two-thirds of the US labor market.
Another sign that the economy could be headed for trouble is the sudden drop in high-yield bond prices in recent months. High-yield bonds carry a higher risk of default, so investors demand higher yields in a shaky economic environment. Bond yields rise when their prices drop.
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The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) just hit its 200-day moving average, which Hartnett said was "ominous." The fund's price dipped below its 200-day moving average in 2020 and 2022, when the economy slowed and stocks underperformed.
Bank of America
This, then, could be a signal that stocks are headed for a downtrend as the S&P 500 sits near all-time highs.
Hartnett said there are other signs, too, that stocks could be in bubble territory. One is that the tech-heavy Nasdaq index is rising at the same time as 10-year Treasury yields, which has historically only happened during bubble or recovery periods.
Bank of America
Are we headed for a hard landing?
Market consensus has shifted from a hard landing in 2022 to a soft landing in 2023 and 2024. But like Hartnett's view, outlooks may begin to shift more to the bear case in the months ahead, with the Fed likely to leave rates higher for longer.
As recent as December, investors were anticipating that the central bank would make its first rate cut in March. But as jobs data has come in hot and inflation has remained above 3%, the Fed is now expected to cut in July. Some are even ruling out cuts for the entirety of 2024.
"We are firmly in the camp of no rate cuts in 2024," said Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, in a memo on Thursday. "While it's unlikely to occur, there is actually a strong case to be made for the Fed to raise interest rates in 2024 given elevated inflation, low unemployment, high stock prices, bitcoin surging and the re-emergence of IPOs."
Geopolitical tensions are also high at the moment, as conflicts continue in Ukraine and the Middle East. This has caused oil prices to surge since December, threatening to kick off another bout of global inflation.
Despite geopolitical and monetary policy risks in the post-pandemic era, however, the US economy has so far managed to skirt a recession, proving bearish forecasters wrong.
It may continue to do so. But as Hartnett argues, the longer a no-landing scenario — where inflation stays high — plays out, the higher the risks of recession and a bear market become.
As stocks continued to fall during the early 1930s, businesses failed, and unemployment rose dramatically. By 1932, one of every four workers was unemployed. Banks failed and life savings were lost, leaving many Americans destitute. With no job and no savings, thousands of Americans lost their homes.
The crash frightened investors and consumers. Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills. Fear and uncertainty reduced purchases of big ticket items, like automobiles, that people bought with credit.
A decrease in implicit value, for instance, leaves the owners of the stock with a loss in value because their asset is now worth less than its original price. Again, no one else necessarily receives the money; it simply vanishes due to investors' perceptions.
Many of the small banks had lent large portions of their assets for stock market speculation and were virtually put out of business overnight when the market crashed. In all, 9,000 banks failed--taking with them $7 billion in depositors' assets.
In addition to the Federal Reserve's questionable policies and misguided banking practices, three primary reasons for the collapse of the stock market were international economic woes, poor income distribution, and the psychology of public confidence.
The 1929 crash was caused by many factors, such as a boom after World War I, overproduction in key industries, increased use of margin for purchasing stocks, lack of global buyers around the world due to the war, and so on.
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
Sometimes, however, the economy turns or an asset bubble pops—in which case, markets crash. Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise. Those who have purchased stock on margin may be forced to liquidate at a loss due to margin calls.
Typically, you'll see your stock portfolio go down during a recession. The dropping stock values partly stem from massive sell-offs as many investors try to get out of the market. As more investors sell their shares, the stock prices fall.
When the market rebounded, Getty was a rich man, thanks to his action when the economy appeared to be at its worst. The same thing happened to people like Warren Buffett, Jamie Dimon, and Carl Icahn during the Great Recession of 2008. Each zigged when the rest of the world zagged.
It can be nerve-wracking to watch your portfolio consistently drop during bear market periods. After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.
In reality, however, no money is actually "removed" from the market. Stock prices are determined by the buyers and sellers in the stock market, so when the market crashes the values of the stocks fall, but they just become less valuable.
If a bank or credit union collapses, each depositor is covered for up to $250,000. If your bank or credit union isn't FDIC- or NCUA-insured, however, you won't have that guarantee, so make sure your funds are at an institution covered by deposit insurance.
Banks can fail for many reasons, but generally they fall into a few broad categories: a run on deposits (which leaves the bank without the cash to pay everyone who wants to withdraw their money); too many bad loans or assets that fall precipitously in value (both of which erode the bank's capital reserves); or a ...
Business houses closed their doors, factories shut down and banks failed. Farm income fell some 50 percent. By 1932 approximately one out of every four Americans was unemployed.
When stocks rise, people invested in the equity markets gain wealth. This increased wealth often leads to increased consumer spending, as consumers buy more goods and services when they're confident they are in a financial position to do so.
The 1929 crash didn't cause the Great Depression outright, with only 10% of Americans invested in the market, but it lowered consumer spending, caused panic that worsened an ongoing recession, reduced corporations' assets and hurt their future prospects, and contributed to a banking crisis.
At the height of the Depression in 1933, 24.9% of the nation's total work force, 12,830,000 people, were unemployed. Wage income for workers who were lucky enough to have kept their jobs fell 42.5% between 1929 and 1933. It was the worst economic disaster in American history.
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