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The likelihood of a hard landing — a scenario in which the U.S. economy abruptly falls into a recession, causing a rush to safe-haven investments — has progressively lost fashion among Wall Street forecasters and investors alike.
Yet, Bank of America’s chief investment strategist, Michael Hartnett — who thrives on contrarian market views — has positioned himself in the unlikely hard-landing camp.
Hartnett unveiled what he believes to be the best portfolio hedge against such an economic downturn.
Thirty-year Treasury bonds have fallen by 45% since April 2020. This marks the worst four-year period in the last 100 years.
Hartnett described bonds as being in an “early secular bear market,” driven by a combination of higher debt, deficits, reverse-globalization, and inflation, which have rapidly pushed bond yields higher.
Despite this grim performance, Hartnett suggests that once a limit is reached, the reversal could be as fast and strong as the initial decline.
The secular bond bear market will end only when both the electorate on Main Street, through elections, and Wall Street, via lower debt ratings and failed auctions, vote for “less government fiscal excess,” according to Hartnett.
Hartnett pointed out that only 11% of global fund managers surveyed by Bank of America currently believe in the hard landing scenario. This indicates that the market sentiment is not aligned with this possibility.
He emphasized the stagnation of real retail sales in April, the stalling of global PMI surveys, and a shifting labor market from “unambiguously strong” to “ambiguously strong” to “ambiguous,” citing data such as the lowest small business hiring plans since 2020, job openings to unemployed ratios being the lowest since August 2021, and the highest unemployment rate since January 2022.
Hartnett noted that “no one is long 30-year Treasury,” attributing this broad-based investor pessimism to the dynamics of U.S. debt.
“The U.S. government spent $6.3 trillion in the past 12 months,” he remarked, adding that while the fourth year of the U.S. presidential cycle is typically the strongest for government spending, historically, a “big slowdown” in spending occurs in the first year of a new presidential cycle.
“At the margin, monetary policy will be easier, and fiscal policy will be tighter over the next 12 months, which is positive for bonds,” Hartnett stated.
All these factors make “30-year Treasury the best cyclical hedge for a hard landing,” he concluded.
As the chart below illustrates, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), which closely mirrors the performance of the 30-year Treasury bond, would need to rally more than 65% to recoup its April 2020 levels.
Hartnett’s Views on Other Asset Classes
Hartnett also shared his views on other asset classes. He believes commodities are in an “early secular bull” market, driven by debt, deficits, reverse-globalization due to higher tariffs, inflation, AI, and climate change.
He describes U.S. stocks as being in a “late secular bull” market, with no change in leadership since 2009 and no recession to shift the market structure. He argued that “valuations are inconsistent with a new bull market.”
Hartnett sees gold in an “early secular bull” market, viewing it as an alternative to the U.S. dollar, akin to cryptocurrency, serving as a hedge against a “bear market in institutional trust.”
Now Read: Expect Rate Cuts, Not Recession – Fund Managers Most Bullish On Stocks In Over 2 Years
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Posted In: TLT
