- The stock market still has room to fall further before it truly marks the bottom of this round of volatility, according to Bank of America Merrill Lynch.
- Over the weekend, the US and China reached a trade agreement that sent global markets ripping higher.
- Michael Hartnett, BAML’s chief investment strategist, is skeptical that the truce marked a bottom for stocks, and has recommendations on how to invest.
The so-called trade truce was not the good news stock market investors were hoping for after weeks of relentless selling, according to Bank of America Merrill Lynch.
At the highly anticipated G-20 summit in Buenos Aires, Argentina, US President Donald Trump and his Chinese counterpart Xi Jinping agreed to a 90-day delay of any new tariffs. Trump also agreed to not hike the tariff rate on $200 billion worth of Chinese goods to 25% from 10%.
Monday’s surge in global stocks revealed investors’ enthusiasm about the deal, although many strategists are warning that the real news from the weekend is that the can has simply been kicked down the road. Count Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, among the skeptics.
“Buenos Aires ain’t Shanghai,” Hartnett said, referring to the G-20 gathering in 2016 that actually marked a bottom for stocks.
He recalled that trader positioning was “extremely bearish,” as were expectations for profit growth, the most important driver of stock prices. Meanwhile, the People’s Bank of China and the European Central Bank were still doing all they could to support their economies in what Hartnett described as policy panic.
The post-G-20 environment in 2018 is different. Expectations for profits — the biggest driver of stock prices — are still nowhere near bearish, Hartnett contends. The chart below illustrates that estimates for global earnings-per-share growth in 2019 still hold up much better than the forecasts investors had from 2013 through 2016.
In sum, there’s still room for more a bearish turn of events that leads to more selling. That’s why Hartnett recommends selling any surges in stock prices.
“We don’t think Nov’18 = Big Low, we still think that’s a few months away,” Hartnett said in a client note.
This guidance is also reflected in Bank of America’s Bull & Bear indicator. It’s a contrarian indicator, meaning it triggers a buy signal when it swings into “extreme bearish” territory. The indicator veered into “extreme bullish” territory when stocks surged at the beginning of 2018, flashing a sell signal that foretold the first correction of the year.
The indicator is now at 2.4, in bearish territory, but not in the extreme zone that would suggest it’s time to go all in and buy.
To that end, Hartnett recommends a 50% equity allocation, but split the other half 25% each in the safety of bonds and cash respectively.
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