Why Bank of America Sees 'Risk Asset Melt-Up' in Q1

As bearish concerns among investors fade, strategists at Bank of America see financial markets poised for a “risk asset melt-up” boosting the S&P 500 Index by 5.2% by early March from its close on Friday, Bloomberg reports. “We continue to expect returns to be front-loaded in 2020,” BofA strategists including Michael Hartnett wrote in a note to clients.

Key reasons for bullishness by BofA include diminishing worries about Brexit and trade wars, plus continued injections of liquidity by the Federal Reserve and the European Central Bank. Meanwhile, investors are abandoning safe haven assets such as gold, the Japanese yen, the U.S. dollar, and high-dividend utility and real estate stocks, all of which have dropped in price recently, The Wall Street Journal observes.

Significance For Investors

While BofA anticipates that the Fed will continue easing, they expect the yield on the 10-year U.S. Treasury Note to climb 36 basis points by Feb. 2, 2020, reaching 2.2%. Rising interest rates at longer maturities often reflect expectations of increased economic growth ahead.

In this vein, bullish investors point to U.S. employment data in the most recent two months that beat expectations, as well an upbeat view on the economy in the Fed's policy statement last week, the Journal observes. Meanwhile, the Caixin China General Manufacturing PMI (Purchasing Managers' Index) has recorded four consecutive months of increases, from August through November, indicating that factories in the world's second-largest economy are recording upticks in activity.

The latest release of the monthly Global Fund Manager Survey conducted by BofA Merrill Lynch is due out on Tuesday, Dec. 17. The BofA strategists indicated in their report that portfolio positioning by fund managers has been turning bullish, and that the survey should reveal rising positive sentiment.

While the spot price of gold is still up by over 15% for the year-to-date, it nonetheless is down by nearly 5% since setting a 5-year high in September. Silver is up by nearly 10% YTD, but down by more than 12% since its 2019 high in September, as of morning trading on Dec. 16.

Other notable strategists recently issuing bullish calls on stocks in 2020 include Nikolaos Panigirtzoglou, Marko Kolanovic, and John Normand of JPMorgan, Julian Emanuel of BTIG, and Sam Stovall of CFRA Research. The most optimistic of these is Emanuel, who has a year-end target of 3,950 for the S&P 500 in 2020, or nearly 25% above the Dec. 13, 2019 close.

Goldman Sachs also has an upbeat view. "We expect 6% EPS growth and alleviating political uncertainty will lift the S&P 500 to 3400 (+7%) by year-end 2020," they write in a current report.

Looking Ahead

Morgan Stanley acknowledges "a trifecta of positive catalysts" for stocks, namely, a dovish Fed that is supplying massive amounts of liquidity into the markets, progress in the U.S.-China trade talks, and rising chances for "an orderly Brexit." However, they are "somewhat unexcited" about U.S. GDP growth in 2020, which they forecast to be just 1.8%. Their base case for the S&P 500 remains 3,000 at year-end 2020, or 5.3% below the Dec. 13, 2019 close.