Commodity assets, cash and cryptocurrencies may show favorable dynamics relative to stocks and bonds against a backdrop of inflation shocks, a recession and policy by the the Fed. Bank of America strategist Michael Hartnett arrived at such conclusions, according to Business Insider.
Investors in the equity market should prepare for the S&P 500 to fall below 4,000 by the end of 2022, implying a drop of about 11% from current levels.
According to the analyst, with consumer demand rebound, persistent supply-chain frictions and the war in Ukraine, inflation has “gotten out of control,” reaching 40-year highs.
“Inflation will trigger a recession. Almost all such episodes in the past have been preceded by it […]. Expectations of higher yields [in the government debt market] and a weaker dollar heightened the likelihood of a downturn,” — Hartnett said.
He warned that the inflation shock would be followed by a rate-hike shock and then a recession shock.
Minutes of the March FOMC meeting reflected policymakers’ readiness to begin shrinking the balance sheet by $95 billion a month from May, which would almost double the pace of tightening seen in 2017–2019. By the end of 2023, the balance sheet could fall from the current $9 trillion to $6.5 trillion. Committee members also signaled they were ready to lift the federal funds rate by 0.5 percentage points in one go.
Such actions would amplify volatility and push yields on government bonds higher, the expert concluded.
“Quantitative easing supported asset prices. Quantitative tightening will have the opposite effect. The [new] era of delayed hawkish Federal Reserve policy begins with an overvalued stock market”, — the report says.
In such circumstances, cash, commodities and cryptocurrencies may display a more favorable dynamic relative to stocks and bonds.
As noted, Bloomberg strategist Mike McGlone previously forecast Bitcoin to reach $100,000 in 2022.
Earlier, analyst and head of Factor LLC Peter Brandt suggested that the bear market in Bitcoin would last until May 2024.
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