Bank of America Strategist Predicts Market Sell-Off Post Trade Deal

Michael Hartnett, a prominent strategist at Bank of America, has outlined a series of key trading strategies in response to the evolving economic landscape. Hartnett, known for his accurate market predictions, suggests that the U.S. stock market has already priced in expectations for a second-quarter trade agreement and lower tariffs. He anticipates that the market will "buy the expectation and sell the fact," meaning that once the trade agreement is announced, the market may experience a sell-off.

Hartnett identifies three macroeconomic factors that could drive further market gains: the China deal, global rate cuts, and strong consumer demand. He warns, however, that the biggest risk to a bear market could come from a deleveraging effect on asset prices, particularly if long-term interest rates spiral out of control due to the policies of President Trump and Federal Reserve Chairman Powell.

Hartnett advises maintaining a short position on the U.S. dollar ahead of a potential rate cut by the Federal Reserve. He also recommends going long on 5-year U.S. Treasury bonds before the Republican budget reconciliation formally confirms future tax cuts or extensions. This strategy is based on the expectation that the market will continue to be driven by the "three Cs": the China deal, rate cuts, and strong consumer demand.

Looking ahead to 2025, Hartnett's investment outlook includes predictions that bonds will outperform stocks, international stocks will outperform U.S. stocks, and gold will outperform the U.S. dollar. This view is grounded in the conflict between the overemphasis on American exceptionalism and the policies of new populism, which include higher tariffs, smaller government, lower immigration, and reduced military intervention. These policies are expected to slow the rapid pace of nominal GDP growth that the U.S. has experienced over the past five years and reverse some of the major investment trends of the 2020s, such as "ABB" (anything but bonds) and artificial intelligence.

Hartnett's strategic advice includes maintaining a diversified investment portfolio, such as a 25/25/25/25 allocation of cash, gold, stocks, and bonds, which he believes will outperform the traditional 60/40 stock-bond allocation. He also highlights the potential for a structural shift in the market, with bonds entering a structural bear market, commodities entering a structural bull market led by gold, and U.S. stocks relative to international stocks entering the late stages of a structural bear market.

Hartnett's analysis is based on historical comparisons of stock performance relative to gold, noting that significant declines in the stock market relative to gold have occurred during periods of major macroeconomic changes, such as the Great Depression, stagflation in the 1970s, and the aftermath of the 9/11 attacks. He suggests that the current environment may be indicative of a fourth major structural shift, with the stock market relative to gold at its lowest point since 2020.

Despite the overall cautious outlook, Hartnett remains optimistic about the transformative potential of artificial intelligence, which he believes will continue to drive productivity gains and support market valuations. However, he also acknowledges the risks associated with AI, including potential political pressures to implement wealth taxes or labor protections if AI leads to job displacement.