This is Exactly How I Feel = 'I'm so bearish, I'm bullish': BofA says 'maximum liquidity' will push stocks to new all-time highs, but a COVID-19 vaccine will mark the 'big top'

By Matthew Fox  Aug. 7, 2020

Spencer Platt/Getty Images

• The stock market is set to continue moving higher in 2020, as "maximum liquidity" is all that matters, according to a Bank of America note published on Friday.
• But under the surface, there's plenty to be bearish about as low yields incite a bubble in stocks just as Main Street enters a recession, BofA said.
• Investors should expect stocks to keep moving higher in 2020, but 2021 will be bearish as a COVID-19 vaccine is likely to mark the "big top," according to the note.
• "I'm so bearish, I'm bullish," BofA's Michael Hartnett said in the note.

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"I'm so bearish, I'm bullish."

That's how Bank of America strategist Michael Hartnett summed up his thinking on the markets in a note published on Friday, as the S&P 500 is just 1% away from making new all-time highs just as Main Street enters a recession, according to the note.

A "decade-long backdrop" of low-interest rates, maximum liquidity, and low growth translates to "maximum" bullishness, according to BofA, adding that "nothing matters but liquidity."

Strong liquidity, driven by easy-money policies enacted by the Fed, is "inciting a bubble" in stocks as it masks the bearish factors that have not been able to shake the current market recovery, Hartnett said.

The bearish factors being masked by strong liquidity that BofA named include:

1. Banks not lending: 71% of loan officers reporting tighter lending standards (the tightest since the fourth quarter of 2008).

2. Governments not spending: With state tax revenues down 30-50% for many states, municipal shortfalls could be greater than $1 trillion in a worst-case scenario.

3. Deficits are soaring: The US federal budget deficit will be at 25% of GDP if the next fiscal stimulus bill in response to the COVID-19 pandemic is greater than $1 trillion, which would be the highest since the World War II peak of 27.5%.

4. Fed printing: Central bank stimulus of $9 trillion in 2020 represents a global liquidity supernova that will continue until either a melt-up on Wall Street trickles down into Main Street wages or if the unemployment rates drop below 5% while inflation rises above 2%.

5. Dollar debasing: "Big inflection points in US Dollar always harbinger of leadership change," Hartnett said, adding the US debt and deficits being financed by the Fed balance sheet will lead to "Japanification" as the Fed buys more US Treasuries.

All of these bearish points are not enough to derail the current stock market rally, but one thing can, according to Hartnett: a COVID-19 vaccine.

A "big top" in 2020 is likely at the time of a successful vaccine, which will lead to "full capitulation by bears, [and] higher interest rates," the note said. 

Additionally, historic bear market rallies mean the S&P 500 can top out between 3,300 and 3,600 between now and January. The 3,600 point on the S&P 500 represents 7% upside potential from current levels.

In sum, Hartnett is bearish but acknowledged how hard it is to be bearish when record driven liquidity from the Fed continues to help stocks move higher. But 2021 might be a different story, according to Hartnett.

"2021 = Bear: bigger government, smaller world, US dollar debasement ... buy volatility and inflation assets," Hartnett concluded.

As Originally Posted: https://markets.businessinsider.com/news/stocks/stock-market-outlook-bofa-covid-vaccine-market-top-bearish-bullish-2020-8-1029482631?utm_campaign=browser_notification&utm_source=desktop#