Bank of America Hartnett: Investment market shifts before January inauguration, allocating U.S. Treasuries, Central and Eastern European stock markets, and gold

Since Trump's victory, global stock markets have shown significant divergence, with the U.S. stock market soaring and market capitalization increasing by $1.8 trillion, while emerging markets lost $500 billion, and the EAFE (Europe, Australasia, and the Far East) market evaporated $600 billion...

However, recently, Bank of America strategist Michael Hartnett stated in his latest report that as U.S. financial conditions tighten, investors are advised to adjust their portfolios before the January inauguration, focusing on U.S. Treasuries, Chinese and European stock markets, and gold.

Rising Risks Before Inauguration, Financial Conditions Tightening

Currently, the market is preparing for Trump's "radical policies," showcasing "radical asset movements." Hartnett noted that investors are prepared for the "U.S. risk" on inauguration day, but even as the stock market continues to rise, U.S. financial conditions are tightening. With the Federal Reserve's interest rate cuts being priced in, the cracks in leverage (gold, small-cap stocks, risk parity, emerging markets) have already begun to show, and any rise in long-term interest rates means a risk reversal.

According to Bank of America's November Global Fund Manager Survey, investors have raised their expectations for U.S. growth and inflation, shifting their belief in a significant increase in U.S. stocks towards small-cap stocks.

Hartnett stated that when the Trump 2.0 trade shows cracks, it will usher in the "TINA (There Is No Alternative) Turner" moment:

"After the election, there are no other trade options but to go long on the dollar, go long on U.S. stocks, and short U.S. Treasuries; however, before inauguration day, further tightening of U.S. financial conditions will change the trade."

"Strong" global macro data may be one of the driving factors behind the tightening of U.S. financial conditions. Hartnett explained that this is because companies are preemptively responding to tariffs. In October, China's export growth rate hit the fastest pace since July, imports at California ports surged, U.S. unemployment claims dropped significantly, and small business pessimism is about to reverse...

All of this is occurring as U.S. inflation hits a bottom, with the core inflation rate reaching a new low of 3%.

Allocate to U.S. Treasuries, Central European Stock Markets, Gold

In investing in "TINA Turner," Hartnett believes that although currently no asset allocators are increasing their holdings in bonds and international stocks, he suggests that asset allocators entering the first quarter of 2025 should lean towards:

1. Buy U.S. Treasuries if yields rise to 5% Hartnett believes that the Federal Reserve will demonstrate its determination to curb inflation expectations in the first quarter by not lowering interest rates in 2025, while U.S. Treasury bonds will force the Trump administration to ease tariffs. He stated:

“For the new government, allowing a second wave of inflation would be political suicide. Although it is difficult to reverse the long-term trend of U.S. government debt and spending... the reality and the new government's awareness of the $36 trillion U.S. debt, $7 trillion U.S. government spending, and $1 trillion U.S. interest expenditure indicate a reduction in fiscal spending.”

2. Buy Chinese and European stocks before inauguration day

Hartnett stated that he believes China and Europe will actively respond to the "America First" tariff policy. Therefore, relative to the U.S., Asia and Europe have lower interest rates, cheaper currencies, and lower oil prices, which will significantly ease financial conditions.

3. Buy gold

Hartnett indicated that a demographic inflection point is approaching, with the dependency ratio expected to reach a low of 53% by 2028, marking the peak of a "de-inflationary" demographic structure; combined with the enormous energy demand from artificial intelligence, this means that gold (and cryptocurrencies) remain the best long-term hedge against inflation.