Investors should buy real assets – from wine to art – as inflation reaches a ‘secular turning point,’ Bank of America says

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    • Bank of America forecasts an uptick in inflation and that rates will weigh on stock returns for the next decade.
    • The bank’s chief investment strategist says investors should buy real assets to hedge against inflation.
    • Real assets are at their lowest point relative to financial assets in almost 100 years, he writes.
    • Sign up here for our daily newsletter, 10 Things Before the Opening Bell

Since the election of President Joe Biden, inflation and its potential comeback have been hot economic topics. Pumping trillions of dollars into the economy could overheat it, critics say, while others see few signs of runaway inflation, either now or in the near future.

Freak events in early 2021 like the Texas freeze and the giant ship stuck in the Suez Canal haven’t clarified the issue, as they contributed to inflationary shocks that may be “transitory” or may not be.

Bank of America’s chief investment strategist, Michael Hartnett, has seen enough to declare a “secular turning point” on inflation and anticipates that stock market returns will be lackluster over the next decade. Stock investors who’ve seen a roughly 10% annual return from recent decades should expect that gain to go down to 3% to 5% over the course of the 2020s, he added.

But he has a recommendation: Real assets are a more overlooked part of the market that may offer investors protection against inflation while diversifying their portfolios.

In a recent note Hartnett said that real estate, commodities, and even collectibles like wine, art, diamonds, and cars could outperform in the next decade. Investors don’t need to own the physical assets, Hartnett added, but instead can own REITs, and specialized funds that focus on these assets.

Real assets are positively correlated with inflation and interest rates, unlike financial assets like stocks and bonds, Hartnett said. During “the Great Inflation” of the 1970s, real estate and commodities outperformed large cap stocks and government bonds. He added that in eras where bonds and stocks struggle, real assets have provided superior risk-adjusted returns.

Over the past 5 and 10 years as inflation fell to the lowest average levels since the 1960s, real assets have seen lower returns and lower volatility, according to BofA data. Now, the price of real assets relative to financial assets are at the lowest point since 1925, making them attractive investments according to Hartnett.

Real assets are also underowned, with only 5.5% of the total market cap of all ETFs exposed to real assets.

Additionally, since 1926, collectibles (8.1%) and commodities (6.3%) have offered higher returns than government bonds (6.0%) and cash (3.4%), albeit with higher volatility.

Bank of America suggested investors seek out funds like the Fine Art Group, Classic Car Fund, and the London International Vintners Exchange Fine Wine Fund Index (FWIFFWID), in addition to REITs and commodity funds if they’re looking for real asset exposure.

Read more: Goldman Sachs says buy these 33 stocks now as profits rebound for companies that suffered the most during the pandemic

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Wall Street and Main Street are both scared of inflation, and how the US economic recovery will hit their wallets

Wells Fargo ATM
Banks large and small, both national and regional, are seeing increased interest in digital and contactless services, as the coronavirus pandemic has forced consumers to rethink the kind of banking interactions they’re comfortable having.

  • Americans of varying backgrounds are growing increasingly concerned of rampant inflation.
  • Google searches for “inflation” reached a record high this week, according to Deutsche Bank.
  • Surveyed fund managers now see high inflation as riskier to markets than the pandemic, BofA found.
  • See more stories on Insider’s business page.

Forget the pandemic. Inflation is the new issue haunting Americans, on Wall Street and Main Street alike.

Celebrations over vaccine approvals and falling COVID-19 case counts are giving way to concerns over just how quickly the economy will recover – and what that means for prices.

New stimulus signed earlier this month promises to send hundreds of billions of dollars directly to Americans and supercharge consumer spending. And shortly afterward, the central bank underscored that it will support a strong recovery this year, as the Federal Reserve reiterated that it plans to maintain ultra-easy financing conditions at least through next year.

The potent combination of monetary and fiscal support has many fearing a sharp jump in inflation. The eventual reopening of the US economy is expected to revive Americans’ pre-pandemic spending habits. Yet an overshoot of expected inflation could spark a cycle of increasingly strong price growth that leaves consumers with diminished buying power.

Worries of such an outcome are shared among both the investor class and the general public. Google searches for “inflation” surged to their highest level since at least 2008 last week, according to research by Deutsche Bank Managing Director Jim Reid. Dovish investors might highlight that similar spikes emerged after the financial crisis, but hawks can point to the unprecedented scale of pandemic-era relief for why today’s situation stands out, Reid said in a note to clients.

“Whether or not inflation ever materializes there is a rational reason why this time might be different. That’s reflected in the increased attention on inflation,” Reid added.

The theme that this time might be different was echoed by a UBS team led by Arend Kapteyn, who wrote in a March note that “pandemic price movements have been unusually large … and are historically difficult to model/predict.”

More recently, a survey from data firm CivicScience shows 42% of adults being “very concerned” about inflation, according to Axios. That compares to just 17% saying they’re “not at all concerned.”

Inflation worries investors more than Covid

Also, institutional investors are shifting their focus from the pandemic to the risk of rampant inflation. Higher-than-expected inflation is now the biggest tail risk among fund managers, according to a recent survey conducted by Bank of America, higher even than the pandemic itself. Snags to vaccine distribution fell from the top of the list to third place, while a potential bond-market tantrum was the second most-feared risk.

To be sure, younger Americans seem less perturbed. The gap in inflation expectations between the baby boomer generation and millennials is the widest its ever been, a team of Deutsche Bank economists led by Matthew Luzzetti wrote earlier this month.

The disparity is likely a product of vastly different circumstances, according to the team. Older investors lived through the “Great Inflation,” a period from the mid-1960s to the early 1980s during which inflation surged and forced interest rates to worrying highs.

Younger Americans have only known a quarter-century of inflation landing below the Federal Reserve’s 2% target, and millennial investors could have a massive influence on whether inflation expectations and real price growth trend higher as the economy reopens, the bank’s economists said.

“With memories of the Great Inflation possibly already lifting inflation expectations for older age groups today, a more material drift higher in expectations likely would require a lift from the younger age groups,” they added.

CivicScience’s newer data suggests that gap is quickly closing. More than half of respondents aged 18 to 24 said they’re “very concerned” about inflation, more than any other age group surveyed. By comparison, just 37% of Americans aged 55 and older said they’re “very concerned.”

Respondents aged 35 to 54 were still the most worried overall, with 48% saying they’re “very concerned” and 36% saying they’re “somewhat concerned,” according to CivicScience.

Kapteyn’s note for UBS highlighted that the conversation around inflation closely resembles the one following the Great Recession: “A decade ago, following the global financial crisis, we were having very similar conversations with clients as we are now.”

At that time, fears of a quick recovery fueling an inflation bubble were similarly strong, “but instead we wound up in secular stagnation,” the bank wrote, referencing the phrase made famous by prominent economist Larry Summers to describe prolonged low growth and low inflation.

This suggests that Americans’ worries about future price growth – including warnings from Summers himself – could starve the US economy of healthy growth and rehash the last decade’s plodding recovery.

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Bill Gross is shorting US Treasurys and says inflation will be as high as 4% in coming months

FILE PHOTO: Billionaire investor Bill Gross listens during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 3, 2017. REUTERS/Lucy Nicholson/File Photo

Billionaire “Bond King” Bill Gross told Bloomberg he is short US Treasurys and is expecting inflation to spike up in the US in the near future.

The PIMCO co-founder said in a Bloomberg TV interview he was short US Treasurys heading into the sell-off last week where the 10-year Treasury rose above 1.6% and prices fell. On Wednesday, the yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020.

He’s still short Treasurys, and he also expects inflation to rise above the Fed’s target to 3-4% in the next few months as nearly $2 trillion in fiscal stimulation enters the market and household income goes “gangbusters.”

“There’s no reason to expect that inflation at least, not necessarily treasuries, but inflation at least will be screaming higher over the next several months and that’s what some investors are anticipating,” Gross said.

He added: “Inflation, you know, currently below 2% now is not going to be below 2% in the next few months. I see a 3% to 4% number ahead of us.”

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2021 is a ‘turning point’ for inflation and stock investors should anticipate lower long-term returns as a result, Bank of America says

worried trader
  • Bank of America sees 2021 as a “turning point” for inflation that could weigh on stock returns.
  • An economic re-opening, $1.9 trillion stimulus, and vaccine rollout could push up inflation.
  • The firm is bullish on value stocks, cyclicals, commodities and real assets against this backdrop.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The lower inflation of the last 40 years that sent interest rates down and stock market valuations higher has reached a turning point, according to Bank of America’s chief investment strategist Michael Hartnett.

“We believe we are at a secular turning point for both inflation & interest rates,” Hartnett and a team of Bofa strategists said in a note Thursday. “We believe 2020 likely marked a secular low point for inflation and interest rates due to a reversal of deflationary secular factors, fiscal excess, and an explosive cyclical reopening of the global economy creating excess demand for goods, services and labor.”

Now, as the economy reopens, vaccine rollout speeds up, and Washington’s $1.9 trillion stimulus bill is signed into law, the US could see a jump in inflation, according to the bank.

That jump could impact long-term equity returns. Stock investors who’ve seen a roughly 10% annual return from recent decades should expect that gain to go down to 3%-5% over the course of this decade, said BofA.

The firm recommends US stock investors focus on value stocks and cyclical stocks against this backdrop. Energy and Materials are the two sectors most levered to inflation, they added. Meanwhile, investors should “be nimble” around secular losers like oil, brick-and-mortar retail, and other areas that are likely to face continued disruption.

They noted it’s too early to price in if and when we’ll see a “disorderly jump in inflation and yields.” However, signs that typically precede inflation spikes are showing: 2021 has been the 4th worst start for the 30-year Treasury in the past 100 years, and the best start for oil since 1974.

“We believe the long-term asset allocation implications of 2020s inflation are bullish real assets, commodities, volatility, small cap, value & EAFE/EM stocks, and bearish bonds, US dollar, large cap growth,” said BofA.

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Americans’ inflation expectations hit a 7-year high as the economic recovery picked up, Fed survey finds

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Meat in grocery store
Businesses are likely to lift prices in line with consumers’ anticipations.

  • Americans are bracing for the strongest inflation in a decade, according to a new Fed survey.
  • One-year inflation expectations rose in February to 3.1% from 3%, the highest reading since 2014.
  • Price growth hasn’t trended above the Fed’s 2% target since the late 1990s.
  • Visit the Business section of Insider for more stories.

Americans are bracing for the strongest inflation in a decade as new stimulus promises to accelerate the US economic rebound.

Consumers’ median year-ahead inflation expectations rose to 3.1% in February from 3%, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations – the highest reading since July 2014. The higher expectations come as COVID-19 case counts dive and business activity sharply improves.

Expectations for inflation three years from now held steady at 3%, according to the Fed.

Each reading would represent the highest inflation since 2011, according to data from the World Bank. Price growth hasn’t steadily trended above the Fed’s 2% target since the early 1990s, and the central bank has been trying to counteract weak inflation for decades.

The Fed now aims to seek inflation of more than 2% for a period of time after the pandemic, and the latest survey of consumers signals consumers are gearing up for such conditions.

Inflation expectations are often used as a preview of how price growth will trend. If consumers expect prices to rise a certain amount over time, businesses are likely to lift prices in kind and workers will seek similar increases in their pay.

To be sure, inflation expectations historically run higher than actual price growth. The University of Michigan’s inflation-expectations gauge, for example, has held above 2% over the past decade despite price growth rarely rising to that level.

The Fed has also indicated that, while inflation expectations may rise to their near-term target, it will wait until true inflation trends higher before it pulls back on ultra-loose monetary conditions. New stimulus and economic reopening are expected to fuel stronger price growth, but the effect will likely be short and temporary, central bank chair Jerome Powell said in February.

Elsewhere in the survey, uncertainty around consumers’ inflation expectations rose slightly for the one-year figure and dipped for the three-year forecast.

Home-price inflation expectations held at 4% last month, the highest level since May 2014. Expectations for the one-year change in gas prices rose to a record 9.6% from 6.2%. Median expectations for rent-cost growth similarly rose to a record 9% from 6.4%.

Household spending growth expectations rose to 4.6% from 4.2%, reaching the highest level since December 2014. Forecasted income growth was unchanged at 2.4%, landing well above the April 2020 low of 1.9% but below assumed inflation.

Americans also grew slightly more confident in making their debt payments and in interest rates rising, the Fed found.

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The stock market’s inflation fears are overblown as explosive economic growth is primed to create a perfect ‘mix’ for more gains, says a Wall Street chief strategist

Traders and financial professionals work on the floor of the New York Stock Exchange
Traders and financial professionals work on the floor of the New York Stock Exchange

  • James Paulsen, Chief Investment Strategist of The Leuthold Group says stock investors shouldn’t fear inflation.
  • Paulsen told investors in a letter that inflation is only a concern for stocks when real economic growth is weak.
  • The strategist said what matters is not either “inflation” or “growth,” but the “mix” of the two.
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The stock market’s inflation fears may be overblown if explosive economic growth comes to fruition to create a perfect “mix” for more gains, according to James Paulsen, Chief Investment Strategist of The Leuthold Group.

In a letter to investors on Friday, Paulsen said that although inflation may be on the rise,  that hasn’t always meant poor returns for the stock market as long as real economic growth is strong.

And with the post-pandemic reopening in sight, many analysts are arguing real economic growth will be impressive in the second half of the year.

In fact, a monthly Bloomberg survey of economists showed annual GDP expectations nearly double to 5.5% from what experts were predicting just two months ago.

In his letter, Paulsen highlighted the two components that have made up nominal GDP since 1950: annual real GDP growth and annual inflation growth.

The strategist illustrated how a perfect “mix” of these components has led to significant stock market gains in the past. He also said that even when inflation rates are high, the stock market has been able to deliver strong returns as long as real economic growth remains strong.

“Regardless of the inflation environment, if real growth is Low, High, or Super High, negative annual market returns are not that prevalent,” Paulsen said.

According to Paulsen, it’s only when real growth slips to the “super low” level that returns begin to fall.

Contrary to popular belief, inflation isn’t always a bad thing for equity markets. According to Paulsen, when real economic growth is “super-high” inflation has “simply not been important.”

Instead, what’s important is the “mix” of annual inflation growth and real GDP growth. 

The strategist said fears of inflation wreaking havoc on the stock market are not “acute,” “because real economic growth is poised to be spectacular, creating a Mix that has historically been supportive for stocks.”

Paulsen did warn that if real economic growth falters going into 2022 and inflation remains high, that could be a recipe “far less hospitable for stock investors.”

“It’s not just inflation; it’s the mix,” Paulsen concluded.

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The bond market is in rebellion over Biden’s stimulus – but not because it would be bad for the economy

jerome powell
Federal Reserve Board Chairman Jerome Powell.

  • The Treasury market is defying Fed messaging and signs of lasting economic damage.
  • Soaring yields signal investors expect the Fed to lift interest rates well before past estimates.
  • Fed officials will likely need to address the bond-market rout to avoid disruption to the economic recovery.
  • Visit the Business section of Insider for more stories.

The Treasury market has made it clear: the Federal Reserve is a downer.

Optimism toward the US economic recovery flourished over the past week. Daily COVID-19 case counts fell further from their January peak. Vaccinations continued across the country, hinting the pandemic could fade in just a few months. Economic data beat expectations. And Democrats pushed forward with President Joe Biden’s $1.9 trillion stimulus proposal, aiming to accelerate the rebound even more.

And yet, these encouraging developments fueled a sudden shock in the Treasury market.

Investors looking to capitalize on a swift recovery dumped government bonds and pushed cash into riskier assets. The 10-year yield soared as high as 1.614% on Thursday, its highest level since the pandemic first slammed the US. The jump immediately cut into stocks’ appeal and dragged major indexes lower throughout the week.

10 yr yield

The narrative behind the move is simple: The increased likelihood of new stimulus juicing the recovery lifted expectations for faster economic growth and inflation. Stronger price growth leads investors to demand higher yields.

Yet the market moved to such an extreme that it now stands in contrast with the Federal Reserve’s own forecast. The central bank has indicated it doesn’t expect inflation to reach its above-2% target until after 2023. The outlook suggests the Fed will hold interest rates near zero through 2023.

The sell-off in Treasurys, however, signals investors are pricing in a rate hike as early as the second half of 2022.

“We’re now getting to the point where the market isn’t necessarily believing what the Fed is telling,” Seema Shah, chief strategist at Principal Global Investors, told Insider. “We’ve now moved to a slightly more concerning ground, where it seems like the Fed’s messaging is not powerful enough.”

Too much of a good thing

Central bank policymakers have so far held their ground. The jump in yields suggests investors are expecting a “robust and ultimately complete recovery,” Fed Chair Jerome Powell said Tuesday. The chair reiterated that the Fed won’t cut down on asset purchases or consider rate hikes until it sees “substantial further progress” toward its inflation and employment targets.

At its core, the sell-off is merely part of the reflation trade, a strategy used to profit from stronger price growth. But the pace at which yields rose is cause for concern, Kathy Bostjancic, head US financial market economist at Oxford Economics, said.

Thursday’s leap was the biggest single-day move since December, and overall bond-market volatility rocketed to its highest since April, according to Bloomberg data. Finally, the gains came despite the Fed continuing to buy at least $80 billion in Treasurys each month.

Treasurys
Chart via BofA Research.

Since yields serve as the benchmark for the global credit market, a sudden rise can rapidly lift borrowing costs, sending rates for mortgages, car loans, and even utilities higher.

If yields gain too much, too quickly, the price action can be “destabilizing,” Bostjancic said. The shock would come as real unemployment still stands at around 10% and industries hit hardest by the pandemic remain far from full recoveries.

“It could choke off this nascent recovery before it gets going,” she said.

Others aren’t so concerned. Bank of America strategists led by Gonzalo Asis said the trend was less inspired by rate-hike expectations and simply a case of “buying the fundamental dip” before strong economic growth.

There’s room for yields to climb higher still, Bostjancic said. Real yields – nominal yields adjusted for inflation – remain negative, signaling there’s still enough weakness in the economy to warrant parking cash in the safe haven.

Looking back to look ahead

To be sure, this is far from the first time markets have abruptly reacted to tightening fears.

Concerns of premature tightening of monetary policy fueled the now-famous “taper tantrum” of 2013, when investors rapidly dumped Treasurys after the central bank announced it would reduce the pace of its asset purchases, fueling a sudden – albeit temporary – shock to the bond market.

The Fed will likely move first in this case  to avoid additional Treasury-market drama, Bank of America economists led by Michelle Meyer said in a Friday note. Updated economic forecasts set to be published after the Federal Open Market Committee’s mid-March meeting should offer some hints at when the Fed’s rate-hike criteria could be reached, the team said.

“The risk, however, is that the Fed won’t have the luxury of waiting for the next meeting and will have to respond to the abrupt market moves in speeches this week,” the economists added.

If the taper tantrum is anything to go by, communication is a difficult balancing act for the central bank. Powell has already said he doesn’t expect any stimulus-fueled jump in inflation to be “large or persistent,” but that commentary did little to calm the sell-off in Treasurys.

Unless the Fed further clarifies its inflation target, investors will remain in the dark as to when tapering could arrive, Shah said.

“There’s so much room for interpretation in terms of how long inflation has to be above 2%, at what level does inflation need to be above 2%,” she said. “That lack of clarity gives the market that room to wonder, ‘what does the Fed actually mean by that?'”

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Tech stocks tumble as investors balk at lofty valuations

Traders work on the floor of the New York Stock Exchange (NYSE) on November 20, 2019 in New York City
Traders work on the floor of the New York Stock Exchange (NYSE) on November 20, 2019 in New York City


US stocks were mixed on Monday with tech stocks pulling back over valuation concerns while investors weighed what rising yields could mean for inflation.

Fundstrat’s Thomas Lee says the case for cyclical stocks within energy, industrials, consumer discretionary, materials, and financials is strengthening as coronavirus cases fall and the US economy begins to re-open.

US lawmakers will debate on President Joe Biden’s proposed $1.9 trillion American Rescue Plan act this week. Also, Federal Reserve chairman Jerome Powell will deliver testimony to the Senate Banking and House Financial Services Committees

Here’s where US indexes stood at the 4 p.m. ET close on Monday:

Shares of Churchill Capital IV spiked as much as 19% on Monday after a Bloomberg report said a merger with the electric-vehicle maker Lucid Motors could come as soon as Tuesday. The report follows weeks of rumors that special-purpose acquisition company Churchill would merge with Lucid. 

Famed Reddit trader Keith Gill has increased his stake in GameStop, according to a screenshot he posted to Reddit on Friday. Gill, who goes by Roaring Kitty on YouTube and Twitter and DeepF—ingValue on Reddit, now owns 100,000 shares of the video-game retailer, representing a double of his previous common share stake of 50,000 shares. 

General Electric gained as much as 5.6% on Monday but Goldman Sachs predicts the stock could jump roughly 20% to $15 per share. Analysts from the firm sat down with GE executives on Friday to discuss the company’s operations and financials. The analysts came away “encouraged” by free cash flow and power business momentum at the company.

Bitcoin tumbled as much as 17% on Monday after hitting a record above $58,000 over the weekend, though Bitfinex CTO Paolo Ardoino says daily price movements are “more of a sideshow.”

“Today’s price movement may galvanize bitcoin’s many critics, including those who recently dismissed the leading cryptocurrency as an economic sideshow. Such criticism misses the point and the profound impact it is starting to have. For many of the battle-tested exchanges that have weathered the market fluctuations, volatility isn’t new and is to be expected in such a young market. For many in the industry, development and deployment is priority,” Ardoino said on Monday.

Oil prices spiked. West Texas Intermediate crude rose as much as 4.14%, to $61.69 per barrel. Brent crude, oil’s international benchmark, jumped 3.7%, to $65.24 per barrel.

Gold rose 1.75% to $1,808.60 per ounce, at intraday highs.

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