Bank of America's chief investment strategist remains bullish.
In his latest Flow Show note, Michael Hartnett, who several weeks ago penned the term "Icarus Trade" to describe what is happening to the market, writes that "we remain long risk in H1 targeting SPX 2500, oil $70/b, GT30 3.5%, DXY 110 (in that order sequentially); note Bull & Bear Indicator up to 7.0 (Chart 1), needs stronger EM/HY inflows & lower cash levels to trigger contrarian “sell” signal (>8.0)"
To validate his point he notes that global stocks (MSCI ACWI) hit all-time highs today and provides two arguments for what happens nest:
- bears say “look what happened after Apr’15 high”;
- bulls say “stocks just 4% above their Oct’07 high.”
To be sure, ongoing fund flows are helping, with the most recent week seeing another $8.5 billion in cash entering stocks (sorry active managers: $9.2 billion of this went to ETFs while mutual funds saw another $0.7 billion outflow).
Still, Hartnett acknowledges that key event risk is coming up and that March could go either way:
- The Upsides of March: SPX 2450 & GT10 2.75% needs…Trump tax reform/Obamacare certainty (note just 23% investors expect tax reform passage by August) + credible Fed hike (following strong data, e.g. PCE >0.3/0.4%, payroll >275k)
- The Downsides of March: SPX 2250 & GT10 2.5% needs…Trump delay/dilution of tax reform + Fed no-go (following disappointing jobs/wages/housing data);
And yet, all of the above may be moot depending on which way the famous "off again, on again" Trump trade is heading.
For anyone looking for a short-hand determination which way the Trump Trade is headed next, Hartnett provides what he calls the "best barometer of “Trump/populist/inflation” trade." The answer: banks versus bonds, or even simpler, the ratio of XLF to TLT. If headed up, Trump is still "winning." But once it takes a decisive step lower, risk assets may quickly turn sad!