Investors should sell on gains in U.S. stocks and the dollar, according to Bank of America analyst Michael Hartnett.
“We remain buyers on dips in bonds, international and gold (in the first half), and sellers on gains in SPX/USD.”
Three factors could help end the market’s “pain trade.”
Bank of America doesn’t believe the recent stock market rally can last, instead it thinks investors would be better off selling on gains as uncertainty persists.
“Sell arrogance, buy shame,” is the advice of the bank’s chief investment strategist, Michael Hartnett.
“We remain buyers on dips in bonds, international and gold (in the first half), and sellers on gains in SPX/USD,” he and his team wrote Thursday, adding that the market’s “pain trade” suggests more downside lies ahead.
The outlook comes amid positive momentum for the S&P 500 this week. The benchmark index is up 7.3% from Monday’s low, driven by signs that Washington’s trade war with China may finally be easing.
But a lasting rebound can’t happen unless three specific developments occur, Hartnett outlined.
First, the U.S. must reach a trade deal that reduces tariffs on Chinese exports to below 60%.
That’s the rate President Donald Trump proposed during his campaign, but so far, the tariffs have been much higher. Intense tit-for-tat trade tensions have pushed Chinese tariffs to 145%, while Beijing has also levied high tariffs on U.S. goods.
Trump has finally said trade talks are underway to ease the conflict, but Beijing has flatly denied that such talks have taken place. Deutsche Bank warned in a recent report that the longer it takes to remove tariffs, the worse the impact on the U.S. economy.
Second, the Federal Reserve must push Treasury yields down by cutting rates.
The tariff turmoil in April sent shockwaves through the bond market, causing benchmark yields to rise.
A Fed statement of support for the market could help lower yields, and a rate cut would push yields down further. Comments from Fed officials this week suggest they are ready to cut rates in the summer if economic data is weak. As of Friday afternoon, investors said they see a 60% chance of a 25 basis point rate cut at the Fed’s June meeting.
Third, consumers must remain resilient.
So far, Hartnett still sees solid spending, likely due to continued labor market strength. For now, that lowers expectations for a U.S. consumer recession driven by a decline in stock wealth among high-income households and rising inflation anxiety.
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