An earlier version of this article incorrectly described changes in investment grade corporate returns over the past decade. The article has been corrected.
Bank of America rang alarm bells over stocks on Friday as it warned of an impending correction.
"3Rs of interest rates, regulation and redistribution are the historical catalysts that end bull markets and bubbles. We say that all" 21 mean events, not "22, and all lower / volatile quarters / years to come" said Michael Hartnett, chief investment strategist at the bank, on the flow show note to clients.
He said investors could face higher inflation in the second quarter, and while the Federal Reserve may be more reluctant to meet in March, April and June, there are headwinds. That shift would coincide with gross domestic product growth of 5%, earnings growth of more than 20%, inflation of around 3% and "visible signs of excessive speculation on Wall Street," he said.
On the regulatory side, Hartnett said investors should note that China's central bank is building liquidity this week. China is "clearly playing the role of the" adult in the room "willing to curb speculative activity in the role reversal 10 years ago."
But once China's tightening coincides with falling bank stocks in the country, fears about liquidity tightening will spread, he said.
The bank has seen strong inflows into stocks over the past 12 weeks, with a record $ 272 billion in stocks, the third largest inflow for debt and emerging market stocks of $ 90 billion, and the second largest ever inflow for small caps at 28 Billion dollars. The S&P 500 has only increased 0.8% since the start of the year, but has increased by 14% in the last three months. The index gained 16% in 2020.
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What else could break the bull? "A new forced sale of QE (quantitative easing) bulls of leadership in high-quality tech and investment grade bonds would be (a) a spookier development," he said
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He found that 52% of all government bonds had returned more than 2% a decade ago, compared to 12% now. On investment grade bonds, 84% offered yields above the 2% threshold 10 years ago, down from just 31% now. No wonder, he said, that high-yield bond issuance will soar in 2021.
Hartnett and the bank also weighed the showdown between short-selling hedge funds and retail investors organized through Reddit's WallStreetBets and other forums, calling it "another escalation" in the war on equality. This has sparked wild action in short stocks like video game retailer GameStop
and the cinema chain AMC Entertainment
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He said the bank's "secular view is that inequality can only end with higher wage inflation for the poor and wealth taxation for the rich," as regulation that only targets new investors will maintain a bull market "in anger".