Bank of America unveils its top 10 trades for 2024, and 6 signs that would confirm a true bull market has arrived

• According to Bank of America strategists, the bear market will not end until six indicators confirm it.
• When they do, a bond, bullion, and breadth bull market will lift stocks higher.
• They recommend bets including going long 30-year Treasuries and “distressed tech” stocks.

Investors have become complacent.

A bullish wind has swept through markets ever since the Federal Reserve decided to keep interest rates unchanged. November was the best month for stocks this year, Wall Street expects rate cuts by June 2024, and bonds have recently soared.

However, this zeal may be too much too soon. Bank of America head of portfolio strategy Michael Hartnett recently wrote to clients that six dominoes must fall before he considers the bull market to have truly begun, and he warned that the economy is at a higher risk of a hard landing than people realize.

Here are the indicators he’ll be watching in 2024, as well as the trades investors should make now to be well-positioned to profit when the bull market arrives.

6 signs the bear market is over and the bull market has begun

Hartnett is aware that Bank of America’s bearish outlook from earlier this year did not materialize, and the firm’s outlook for 2024 is far more optimistic.

Bank of America and BMO both believe that the S&P 500 will surpass its all-time high and reach over 5,000 next year. Hartnett said the bank’s starting point is a “soft landing in US & global economy, lower inflation, easier monetary policy, higher oil prices, lower US dollar, modest decline in bond yields, modest but broader upside in global equities.”

But that doesn’t mean the rest of the year will be easy. Hartnett is keeping an eye on the “3Cs” — credit, crude, and the American consumer — which could signal a slowing in growth.

Hartnett believes that these three factors could interact to cause a chain reaction of events: A weaker consumer would spend less on goods and services, resulting in lower profits for businesses across the economy. A credit crunch could hit those businesses even harder, cutting off growth opportunities through low-interest loans. A difficult year for oil as a result of geopolitical tensions and a glut of US shale supply could cause issues for consumers, corporations, and Congress alike.

Or, to put it another way, the “3Cs” could kick off the “3Ps”: bearish investor positioning, recessionary profits for companies, and policy panic by the US government. The combination of these three factors would be a drag on stocks, which Hartnett anticipates will occur sometime in the first half of next year.

“We believe the risk of a “hard landing” for the economy is higher-than-expected; a soft landing which takes bond yields from 5% to 4% is bullish risk, but a deeper recessionary decline in yields from 4% to 3% is bearish risk; driven by weak growth & EPS we expect risk asset downside in early-24, lower yields-lower stocks correlation,” Hartnett wrote.

Top 10 trades of 2024

However, the outlook isn’t entirely bleak. A slowdown in credit, crude, and consumer spending could spark bearish positioning, recession-level profits, and policy easing in the first half of the year. However, Hartnett believes that in the second half of 2024, the “3Cs” and “3Ps” will combine to launch a bull market in the “3Bs”: bonds, bullion, and breadth.

“Bonds can easily deliver equity-like returns in 2024,” Hartnett wrote. This is especially true if “a weaker US economy & Fed cuts delivers cyclical decline in bond yields & US dollar (+ve gold).”

So, how should investors approach a market with so many moving parts? If the economy enters a potential recession and the stock market falls, Hartnett advised investors to sell “no landing” investments such as “Magnificent Seven, SOX, XHB, XBI, XBD, Japan,” he wrote. Instead, they should invest in “hard landing” plays as soon as a recession begins, such as REITs, stocks in the banking, retail, utilities, and consumer staples sectors, small cap stocks, and Chinese investments.

Of course, there’s a chance that US politicians will do everything they can to alleviate the effects of the recession before voters go to the polls. Any panic policy moves, according to Hartnett, could be a “catalyst for outperformance of leverage over quality, small over large, value over growth, international over US.”

If, as Hartnett predicts, the 3Cs lead to the 3Ps, which then trigger the 3Bs, investors may be in for a volatile first half of 2024. However, if they position themselves wisely now, they will be able to capitalize on a turnaround in the second half of the year.

To that end, here are Hartnett’s top ten trades for 2024. His reasoning for the trade is included with each investment.

1. Long blended 30-year UST/IG/HY/EM bond portfolio

Reasoning: High yield + “equity returns without equity risks”

2. Long zero-coupon bonds

Reasoning: “Peak yields” + “hard landing” hedge

3. Long IG tech bonds

Reasoning: “Own tech balance sheets but not tech EPS in ’24”

4. Long EU subordinated debt

Reasoning: Big yields & big EU winners on “peak yield” theme

5. Long GCC US$ bonds

Reasoning: Strong Saudi/Gulf Cooperation Council balance sheets + hedge against energy crisis

6. Long Japanese yen

Reasoning: BoJ rate hikes to trigger big capital repatriation to Japan

7. Long EM asset

Reasoning: “Peak US dollar” play & China can surprise on upside

8. Long equity “diamonds in the rough”

Reasoning: Buy best stocks in most unloved levered regions/sectors of banks, utilities, REITs, UK, China

9. Long distressed tech vs Magnificent Seven

Reasoning: Lower rates = lower EPS much better for biotech/renewables than crowded monopolistic tech

10. Long ACWX & SPW

The iShares MSCI ACWI ex U.S. ETF (ACWX) tracks non-US large- and mid-caps, while the SPW is the S&P 500 equal-weight index.

Reasoning: Risk-return in consensus “soft landing” looks great in equity breadth, small cap, value, international