Prepare for a Bear Market in 2022: Bank of America

Prepare for a Bear Market in 2022: Bank of America

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Netflix is one company that has seen shares give up their pandemic gains.

Kaspars Grinvalds/Dreamstime

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. The invasion will exacerbate inflation, which will force central banks to tighten monetary policies faster, according to Hartnett. And Fed tightening isn’t likely to end until we see a “recession shock,” he says. “Put another way, Russia/Ukraine increases risk of stagflation and ‘policy mistake,’” he adds.

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 was the only one to produce positive returns during the 1973-74 stagflation shock, triggered by the OPEC oil embargo.

Other asset classes that should hold up relatively well include Treasury inflation-protected securities, or TIPS, small-cap value stocks and emerging markets (the latter because of their links to commodities).

Tactical bets may also pay off, for instance, when the Nasdaq falls at least 20% below its 200-day moving average. The Nasdaq was down 15% from those averages on Thursday, which may have helped trigger its bounce.

Another buy signal would be when at least 80% of global equity indexes fall below their 50-day and 200-day moving averages. Currently, 31% of indexes are below those averages.

At some point, market capitulation will settle in—the market will be so washed out that it will be time to buy. But we aren’t there yet in stocks, Hartnett writes, and the Fed hasn’t even begun to tighten. “Portfolios should position for stagflation and dollar debasement,” he says.

While this outlook seems quite depressing, it isn’t assured. For all the negatives, one could find counterpoints, including a strong U.S. economy, lower energy intensity in the economy than in the 1970s, and productivity gains arising from technology and globalization.

Stock multiples also have come down and many large-cap growth companies have fallen so much that they’ve given up their pandemic gains, including


Walt Disney

(DIS),


Salesforce.com

(CRM),


Netflix

(NFLX),


PayPal Holdings

(PYPL), and


Meta Platforms

(FB).

Whether they’re truly bargains depends on one’s outlook: If the Fed can thread the needle with its monetary policies and the geopolitical tensions calm down, the markets should rise modestly as the economy slows over the next year, but doesn’t fall into a recession. Conversely, if we head into another ’70s era of stagflation—high inflation and stagnant growth—it may be wise to seek shelter in cash and commodities. The bell bottoms remain optional.

Write to Daren Fonda at daren.fonda@barrons.com

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