Here’s how Michael Hartnett is seeing things.

First, recall from about two months ago when the BofA strategist almost perfectly prophesized how the tech/Mag7 rally would, at the very least, begin to stall:

May 31: “next is value outperforming growth stocks + breadth reversing as economic growth slows… catalyst is a benign “

📝 “Breadth” refers to the number of stocks participating in a market movement, up or down. It’s been very weak in the first half of 2024 because Big Tech has dominated.

Lo and behold, that was exactly the catalyst we got on July 11th in the “cold” CPI print, and, instead of sending stocks surging as rate cuts get priced in (this is “buying the rumor”), now with 100% chance of rate cuts, the rally reversed into selling by the end of last week (this is “sell the fact”).

Then, we go to last week where Hartnett signaled what would be the ultimate recession catalyst, in certain terms, and how to tell the (widely expected) soft landing apart from a hard landing:

“if data confirms soft landing (limited deterioration in labor market, yields remain ~4%), this finally bullish for market breadth (leverage, value, EM and so on) but ‘sellers’ strike’ in mega-cap tech/AI won’t change…stocks sideways but breadth much better (although many cyclical sectors have discounted this outcome).“

“…if data confirms harder landing (unemployment rate moves toward 4.5%, payrolls trade much more straightforward asset allocation flip to bonds, from stocks, likely very painful selling in tech; we say market not sufficiently pricing in risk of harder landing.“

In his latest Flow Show from Friday, Hartnett summarizes the big picture: “investors bullishly assigning 100% probability of Fed rate cut Sept 18th, 75% probability of Trump winning US election Nov 5th, and 68% probability of ‘soft landing’…; Sept 18th/Nov 5th ‘buy rumor, sell fact’ dates…sell 1st rate cut still the call.“

Heading into these two catalysts (the first rate cut in September, and the election), Hartnett says that he is “bullish bonds, bullion, breadth (rotation to “poor” distressed value e.g. REITs, distressed growth e.g. biotech, not “middle class” sectors already priced for soft landing).“

But suggests selling the events as they will be widely expected and thus already priced in.

Hartnett concludes by taking a closer look at the top two Ps the matter: Politics and Policy.

On Politics, he writes that “investors fear US election sweep means inflationary higher tariffs, lower taxes, lower immigration, thus higher bond yields“, and yet the electoral reality is that to voters “inflation” is what matters most (how else to explain sub-40% Presidential approval rating with 4% unemployment rate).

Hartnett cites a recent study which found that 70% of young voters in key battleground states say “cost of living/inflation” most important issue and 2024 is the first election in 30 years in which Baby Boomers won’t be majority voting bloc: 65 million Gen Z & Millennial votes will outnumber 50 million boomers.

Electorate wants low inflation…which is bullish bonds (although the Trump presidency may have to go through a rather painful realization phase before figuring out that a hard landing is the one surefire way to neuter inflation).

On Policy: the irony is that those “much hated” 2018 Trump tariffs and trade war have been maintained/extended by Biden; yet Hartnett says new tariffs in the next 12 months more likely to be deflationary than inflationary because the “2018 trade war occurred with backdrop of strong global macro & low interest rates; 2024/25 backdrop for tariffs is much weaker.“

This means new tariffs threaten a weak global economy with recession (tax hikes on global economy + business uncertainty).

🔗 BofA (Hartnett)

It should also be said that Hartnett has remained in the ‘hard landing’ camp since at least September 2023: “Soft landing all the rage but ain’t a bond manager in the world with more than $150bn of AUM who doesn’t think there won’t be a hard landing.”