BofA strategists still see end game for S&P 500 below 3,600, US dollar as 'great short' of 2023

In a research note sent to clients, Michael Hartnett and Myung-Jee Jung said they still believed that the 'end game' for the S&P 500 would be a drop below the 3,600 point level once stagflation returned between the fourth quarter of 2022 and the first quarter of the following year.

Even if the monthly prints for headline consumer price inflation in the US averaged just 0.3% month-on-month over the next six to nine months, that is to say half their average increase over the past six to nine months, that would stil leave the annual rate of CPI at around 5% in the first quarter of 2023, they argued.

Simply put, in the absence of a big recession, it would be "very tough" for inflation to recede back to a 2.3% pace over the next 12 months, they added.

And should they be wrong? In that case, the best hedges against additional upside would be Emerging Market debt, banks and resources.

Nevertheless, until the next meeting of the Federal Open Market Committee, the US central bank's main decision-taking body for policy, the S&P 500 was seen trading in a range between 3,800-4,200 points.

Looking further ahead, Hartnett and Jung predicted a bear market in bonds and stocks in the 2020s.

The first factor behind that would be global central banks' decision to do away with their 'forward guidance', which had kept volatility low over the preceding 20 years.

A second factor was the deepening geopolitical volatility, including deepenig protectionism in food, energy and technology as the "bull market in reckless geopolitical actions" shows no sign of abating.

That would "unambiguously inflationary".

For now, the end of the era of deflationary globalisation was US dollar positive, but the looming recession in the US over the next 12 months would make of the Greenback the "Great Short of 2023".