But as the Fed and others end asset purchases and gradually raise rates, investors will have to brace for significant changes, Hartnett wrote.
In that climate, he advised investors to focus on “inequality, innovation and immortality,” that would benefit pharma companies and technology disruptors, along with inflation plays in commodities, value stocks and markets outside the U.S. and Canada.
“The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation,” he said. “Until this Fed hiking cycle ends we suspect absolute returns from financial assets will remain slim & volatile.”
The low interest rates and aggressive easing programs fueled a massive run-up in global debt — from $172 trillion pre-crisis to $247 trillion now. Chinese debt rose 460 percent to $40 trillion, global government debt is up 73 percent to $67 trillion, and total U.S. government debt has soared nearly 82 percent since the Sept. 15, 2009 implosion of Lehman, the flashpoint for a crisis that had been brewing for years.
Investors used to central bank largess are now underestimating the Fed’s resolve to normalize policy, Hartnett said. The central bank has raised rates seven times since December 2015 and is on track for two more hikes before year’s end.
Echoing concerns heard across Wall Street, Hartnett noted that additional increases could cause short-term government bond yields to eclipse longer-term rates, a condition known as an inverted yield curve that has preceded each of the past seven recessions.
“Yet the Fed is now saying ‘this time is different’ and a flat/inverted curve won’t stop them hiking,” he said. “A much more hawkish-than-expected Fed is the most likely catalyst for fresh losses across asset markets.”
There have been market disruptions that could get worse: Hartnett called cryptocurrency bitcoin the “biggest bubble ever” that has room for further losses.
The latest leg of the bull market has been fueled by last year’s tax cut that also contributed to soaring corporate earnings along with a fresh round of share buybacks that is expected to eclipse $1 trillion this year. Buybacks have totaled $4.7 trillion since the crisis.
However, Harnett worries that the fiscal easing has contributed to “polarization ” in markets that has seen the U.S. performance surge and decouple from weakening global markets. The last two instances of significant fiscal stimulus ended with “currency overvaluation, domestic overheating, and massive schisms in global markets.”
Hartnett advises investors to watch bank stocks, which have pushed higher along with interest rates. If that relationship breaks down, it would signal a larger negative impact from Fed tightening.
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