Bank of America's Hartnett: The election will strengthen Wall Street's four core trades, but inflation and economic recession will reverse everything

On October 27th, Eastern Time, Bank of America analyst Hartnett mentioned in his latest report that the U.S. presidential election will strengthen four core trading strategies on Wall Street, namely bullish on gold and tech stocks, bearish on bonds, with other assets being "rental", providing relatively stable returns but limited growth potential.

Hartnett presented his reasons for being bullish on gold. On one hand, the market is concerned that Fed rate cuts may lead to inflation and economic overheating, rather than economic growth. The actual market reaction to Fed rate cuts is investors selling U.S. bonds, with yields on Euro-American basic bonds jumping by double digits last week. At the same time, there is a higher concentration in the U.S. stock market, with investors buying into the seven tech giants rather than the broader market.

Furthermore, global political instability, whether in France or the UK, has seen a decrease in voter interest in mainstream political parties. Investors are starting to doubt whether these parties will implement traditional fiscal and monetary policies, leading to a decrease in investor willingness to purchase government bonds. Therefore, Hartnett believes that now is not a good time to buy bonds and stocks.

Population and immigration policies are also key factors. Hartnett is concerned that Western voters are starting to vote against large-scale immigration, leading to a decrease in workers and employers having to raise wages. To maintain profits, companies may pass these costs on to consumers, leading to inflation, which is another reason for Hartnett's bullish view on gold.

Fiscal policy and inflation costs drive the bull market in gold

A week ago, Bank of America analyst Michael Hartnett released a report stating that despite the general market expectation of a Republican landslide, the performance of two assets stood out, namely gold and oil. Historically, if the Republicans win big, gold prices should be lower and oil prices should be higher.

However, the results were the opposite. Gold has been on the rise in recent years, hitting new highs throughout the year, with spot gold hitting historic highs for three consecutive days this week, reaching a new high of $2,758.49 on Wednesday, far exceeding the highs of $2,000 in 2020 and $1,900 in 2011. Hartnett pointed out that the driving force behind this bull market in gold is mainly fiscal policy and inflation.

2020s have seen the U.S. and global fiscal deficits, with governments printing money to stimulate the economy. Combined with global political instability, tech and trade wars bringing great uncertainty, and protectionism disrupting the global supply chain, these factors have exacerbated inflation, triggering global safe-haven demand. The market is concerned about currency devaluation, leading to a large purchase of gold for hedging, driving gold prices continuously higher.

In addition, the Fed has started a rate-cutting cycle, which may continue for the next few quarters. If not controlled properly, this could stimulate inflation to rise again. Bitcoin recently hit the $75,000 mark, reaching a historic high, further proving the market's concerns about inflation and U.S. dollar devaluation.

Based on these circumstances, Hartnett has predicted that the price of gold will continue to rise in the future, exceeding $3,000 per ounce. Moreover, just looking at the performance of gold prices last week, his prediction logic has been continuously confirmed. When gold prices broke through a new high of $2,750 last week, it had risen by about 31% since the beginning of the year, becoming the asset with the highest return rate of the year, even surpassing Bitcoin.

The prediction market platform Polymarket recently opened a market for people to bet on whether the price of gold will reach $3,000 on January 1st.

On October 27th, Eastern Time, Hartnett mentioned in his latest report that gold not only reached a historical high relative to global stock markets (excluding US stocks), but also outperformed the NYSE index over the past 10 years. This means that gold is not only performing well in the short term, but also a good long-term investment. As a result, investors have started to buy gold in large quantities, with the single-week fund inflow of gold funds reaching the highest level since July 2020.

Over the past decade, gold has been a relatively low-key investment choice, not attracting much attention from investors seeking quick profits. These investors prefer assets with large price fluctuations in the short term that can be quickly bought and sold for profit. Hartnett is concerned that if the price of gold suddenly surges, these investors seeking short-term profits may start buying gold in large quantities in hopes of making a profit.

Hartnett warned: "We are bullish on gold, but if the confusion caused by the US presidential election results leads to a sharp rise in gold prices and bond yields, it may disrupt the current 'Goldilocks' market state, which is neither too hot nor too cold, just right, and reverse the gold bull market. A sudden surge in gold prices could lead to a faster market downturn."

Because a rapid rise in the price of gold may be seen as a signal of market instability, causing investors to become cautious and reduce their investments. On the contrary, a slow and steady rise in the price of gold is considered an ideal scenario, often seen as a sign of a healthy and stable market.

Wall Street Trading Core Strategy: Long Gold and Tech Stocks

Hartnett believes that the upcoming US presidential election will strengthen four core trading strategies on Wall Street:

1. Long gold, which can hedge against inflation and populist risks. Populism may lead to policy instability, increasing economic uncertainty

2. Bullish on technology stocks, especially AI.

3. Shorting US Treasuries, based on concerns about US debt and deficit issues. If the government has too much debt, it may affect its credit and currency stability.

4. Everything else is "rent", which means that investments other than the above three strategies are considered similar to "rental" income. They provide relatively stable returns but limited growth potential.

It is worth noting that Hartnett warns that these four core trading strategies will change if any of the following two situations occur:

1. Economic recession. If economic data, especially the addition of less than 50,000 jobs in the non-farm payroll report, usually indicating an economic slowdown that may lead to a recession. In this case, investors typically withdraw from the higher-risk stock market and invest in the relatively safe, lower-risk bond market, which usually provides more stable returns during uncertain economic periods.

2. Election landslide and inflation. If the US election results in a landslide victory for one party and the addition of more than 250,000 jobs in the payroll, it may indicate rapid economic growth. This could lead to the Federal Reserve raising interest rates instead of lowering them to stimulate the economy, reversing the leadership position of gold and technology stocks.

Usually, when the Federal Reserve cuts interest rates, bond yields fall. However, this time is a bit unusual as bonds are not as attractive as before, and bond yields have risen significantly after the Federal Reserve cut rates, with the 10-year US Treasury yield hitting a three-month high last Friday, and European and American basic bond yields both jumping by double digits last week.

This may be because the market is concerned that the Federal Reserve may have made a major policy mistake, and its decision may trigger the next wave of inflation. Therefore, despite the rate cut by the Federal Reserve, the actual financial environment has become tighter, and the actual cost of borrowing has not decreased much.

At the same time, Hartnett also believes that now is not a good time to buy stocks. Although this situation has not yet affected the stock market because third-quarter company earnings are still good, the rise in the stock market is mainly concentrated in the seven tech giants, rather than most stocks, which is not healthy.

In addition, Hartnett pointed out that Risk Parity (RPAR) fell by 5% in October, Risk Parity is an investment strategy designed to balance the risks of different assets. When Risk Parity falls, it means that market risks are increasing, and investors may become more cautious. This is a warning signal indicating that if financial conditions further tighten, such as if borrowing becomes more expensive or harder to obtain, investors may reduce their investments in stocks , which could have a negative impact on risk assets such as stocks.

Overall, Hartnett believes that the market's reaction indicates that the market is concerned that the Fed's rate cut may lead to inflation and economic overheating, rather than economic growth. Therefore, now is not a good time to buy bonds or various stocks, which is also why he is bullish on gold.

Unless AI accelerates, immigration policies tighten, or trigger an inflation crisis

Furthermore, Hartnett has another reason for long-term bullishness on gold, which is demographics. He quoted the saying "demographics determine destiny" and pointed out that in recent years, globalists have brought deflationary pressure by introducing millions of illegal immigrants. However, now Western voters are starting to vote against this large-scale immigration, which may lead to inflation. Restricting immigration may reduce labor supply, thereby pushing up wages and prices.

Hartnett explains:

1. Government debt and inflation. Hartnett said that excessive government spending in the United States, combined with policies that the Fed may adopt to cause inflation, as well as the reversal of globalization trends (de-globalization), may lead to money losing value, rising prices, all of which are reasons for the 47% decline in the price of 30-year US Treasuries since March 2020.

2. Impact of immigration on population growth. Hartnett mentioned that in Canada and the UK, although the number of births and deaths is almost equal, the population is still growing because a large number of people are immigrating to these countries. In the UK, the number of births and deaths reached the same level, which has only happened for the third time in the past 185 years. However, despite the decline in the number of births, the UK's population still grew by 1.1% in 2024, the highest growth rate in 74 years. The situation is the same in Canada, with a population growth of 3.2% in 2023, the highest level since 1957.

1. How investors view immigration. Hartnett stated that investors generally view immigration positively because it contributes to economic growth. On the one hand, immigration increases labor supply, which may lower labor costs (wages) as there are more people available to work in the market. On the other hand, the increase in immigration also means that government and consumer spending will increase, as new immigrants need to consume and pay taxes.

In conclusion, Hartnett believes that despite the decline in birth rates, the populations of Canada and the UK are still growing due to the increase in immigration. This population growth is positive for investors as it contributes to economic growth. However, this may also lead to inflation because there is more money in the market and demand has increased. This is why Hartnett is bullish on gold in the long term, as gold is often seen as a hedge against inflation However, now the immigration policy has changed. In the past, policymakers in some Western countries tried to address the issues of aging populations and labor shortages by increasing immigration. They believed that immigration could increase the workforce and promote economic growth. However, at the same time, ordinary people (middle class) in these countries found their lives becoming increasingly difficult. This is because the policies of central banks are making the rich richer, while ordinary people and the poor are finding it harder to earn money. The widening wealth gap has made many people dissatisfied, leading them to demand action from the government. More and more people are supporting political parties advocating for stricter immigration policies.

Now, politicians in North America and Europe are responding to the demands of voters and adopting stricter immigration policies. For example, Canada plans to reduce the number of temporary foreign workers from 7% of the total population to 5%. Hartnett pointed out that in this context, tightening immigration policies lead to a decrease in the number of immigrants, and employers may have to raise wages to attract and retain workers. Wage increases will raise production costs, and in order to maintain profits, businesses may pass these costs on to consumers, leading to inflation.

Therefore, an increase in immigration may push up prices by increasing consumer demand, while restricted labor supply may increase inflationary pressures by raising wages and production costs. Both scenarios could lead to price increases, but the underlying economic mechanisms are different.

Hartnett mentioned that unless the adoption of AI significantly accelerates, the pressure of inflation may persist. This is because AI can improve production efficiency without the need to increase manpower.

It is also worth noting that, according to Hartnett, although immigration trends may have an impact on the labor market, wage growth in Canada, the UK, and the US is still quite strong. The wage levels in these three countries are rising, with growth rates of 4.6% in Canada, 4.4% in the UK, and 4.0% in the US. This indicates that even with immigrants entering the labor markets of these countries, wages are still increasing, showing that there is still strong demand for labor.

He reviewed the situation in the 1970s, at the beginning of the 1970s, many countries adopted loose fiscal and monetary policies to stimulate the economy, but later found that this led to high inflation, so further policy adjustments were needed to control inflation. Hartnett believes that the current situation is similar to the 1970s and may also require inflation to end the current loose policy.

Global Political Situation Unstable

He also expressed concerns about the growth and debt levels of the US government, with annual interest payments exceeding $1.1 trillion. The US government's debt level is very high and continues to rise.

Another point is the political situation. The 2024 elections show that in the UK, only 57% of voters voted for mainstream political parties, the lowest level since 1918; in France, this figure is 36%, the lowest since 1945. This means that an increasing number of voters no longer support traditional mainstream political parties and may be turning to smaller parties or choosing not to vote.

As voter interest in mainstream political parties wanes, investors also begin to doubt whether these parties will implement traditional fiscal and monetary policies. This doubt has led to a decrease in investors' willingness to purchase government bonds ("buyer's strike"), as investors are reluctant to buy government bonds for fear that the government may not implement effective policies to ensure stable economic growth. Meanwhile, stock market investments have become more concentrated, with tech giants appearing more stable while the future of other companies seems less certain. Therefore, this skepticism is reflected in the cautious attitude towards government bond and stock market investments.

Hartnett believes that if the outcome of the US elections results in a political and fiscal deadlock, such as no party being able to clearly control the government, this uncertainty may change investor behavior. Political deadlock may force the government to adopt more cautious and conservative policies, which could restore investor confidence in government bonds.

Finally, Hartnett predicts that if the geopolitical situation improves in 2025, such as international relations becoming more harmonious, oil prices may decline. This would benefit international market investments, as a decrease in energy costs usually promotes economic growth