Bank of America Sees 2021 as Turning Point for Inflation, Weighing on Stock Returns

Strategic Insights -

A turning point in inflation, potentially triggered by the economic reopening, $1.9 trillion stimulus, and vaccine rollout, could push up inflation and impact long-term equity returns. Michael Hartnett, chief investment strategist at Bank of America, believes the lower inflation of the last 40 years has reached a turning point, which could lead to a secular shift in interest rates. In response, the firm recommends focusing on value stocks and cyclicals, with Energy and Materials being the most leveraged sectors to inflation.

Key Takeaways:

  • Bank of America sees 2021 as a turning point for inflation, potentially driven by the economic reopening, stimulus, and vaccine rollout.
  • The lower inflation of the last 40 years has reached a turning point, according to Michael Hartnett, chief investment strategist at Bank of America.
  • Long-term equity returns could be impacted, with investors expecting a 3-5% annual return over the next decade, down from a 10% annual return over the past decades.
  • The firm recommends focusing on value stocks and cyclicals, such as Energy and Materials, which are the most leveraged sectors to inflation.
  • Investors should be aware of the potential for a "disorderly jump in inflation and yields."
  • Signs of potential inflation spikes include the 30-year Treasury's worst start in the past 100 years and the best start for oil since 1974.
  • Bank of America's long-term asset allocation implications are bullish on real assets, commodities, volatility, small cap, value, and EAFE/EM stocks, and bearish on bonds, US dollar, and large cap growth.

Statistics:

  • The US could see a jump in inflation, potentially impacting long-term equity returns.
  • The expected annual return for long-term equity over the next decade is 3-5%, down from 10% over the past decades.
  • Energy and Materials are the two sectors most levered to inflation.
  • 2021 has been the 4th worst start for the 30-year Treasury in the past 100 years.
  • The best start for oil since 1974.

Sources:

  • Bank of America's chief investment strategist Michael Hartnett
  • Bank of America note
  • Business Insider article "Stock market outlook: Inflation, stimulus, and returns in 2021 could be a 'disorderly mess', says Bank of America"