Barron's - Bank of America: Prepare for a Bear Market in 2022

Article by Daren Fonda in Barron's

The recent recovery in stocks may be short-lived, according to Bank of America Securities, which sees a bear market setting in through 2022 and suggests that investors tilt to cash and commodities.

BofA laid out a witches’ brew of negative trends, signals, and data points in a note published Thursday by chief investment strategist Michael Hartnett and his team. “If it walks like a bear…” it probably is, they write.

More than 75% of stocks in the Nasdaq Composite Index and 51% of S&P 500 stocks are already in a bear market—down more than 20% from peak prices, Hartnett notes. The outlook is worsening with geopolitical risks exacerbating potential for inflation, higher commodity prices, and “shocks” to growth.

Negative real interest rates, adjusted for inflation, are another ominous sign. Going back 250 years, negative rates have been “synonymous” with crashes, panics, and wars, he notes.

Hartnett also calls out signs of cracking in retail and home-building, pointing out that Home Depot (ticker: HD) stock is down 29% from its peak while builders such as Toll Brothers (TOL) are off 38%. The declines imply cracks in consumer spending, which rarely happens outside recessions, he notes. And the Federal Reserve, far from riding to the rescue with market stimulus, is tightening the noose, planning to raise rates and withdraw liquidity to try to quell inflation.

“We’re bearish,” Hartnett writes, adding that inflation shocks will ripple through to rate hikes and lower growth, resulting in “negative returns” for corporate bonds and stocks in 2022.

Russia’s invasion of Ukraine is only making a tough macro outlook even worse.

If we are headed for the dreaded stagflation of the 1970s, investors should lighten up on tech stocks and tilt to cash and commodities, Hartnett advises. Of all the major asset classes, commodities were the only one to produce positive returns during the 1973-74 stagflation shock, triggered by the OPEC oil embargo.

At some point, market capitulation will settle in—the market will be so washed out that ......

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