- Investors should sell the rally in stocks ahead of upcoming Fed interest rate hikes, Bank of America said in a Friday note.
- BofA's Michael Hartnett expects the Fed to raise interest rates by 0.50% in March 2022, ahead of consensus.
- The bank also highlighted the striking similarity between the unwind in tech during the 2000 dot-com bubble and today.
The stock market's recovery rally over the past week represents an opportunity for investors to sell ahead of an upcoming Fed interest rate "shock," Bank of America's Michael Hartnett said in a Friday note.
Hartnett recommends investors "sell the rip" rather than "buy the dip" in stocks as interest rate hikes are about to rock Wall Street, and amid a strikingly similar unwind in tech stocks compared to the dot-com bubble in 2000.
According to Hartnett, the Fed could, and should, begin to hike interest rates at its December meeting next week. If they don't, the market will price in a 0.50% interest rate hike in March 2022 because of a "red hot labor market," Hartnett said, pointing to Thursday's jobless claims data hitting its lowest level since 1969.
If Hartnett's Fed rate hike expectations pan out, that would likely be a shock to Wall Street, with most market participants expecting the Fed to start with a 0.25% rate hike in the second half of 2022. "The lead indicator (yield curve) all say 'Fed coming', but investment grade bonds and FAANG do not," Hartnett said.
Hartnett is referring to the mega-cap tech complex, which consists of five stocks driving 64% of the Nasdaq's 23% year-to-date gain. Those five stocks are Microsoft, Alphabet, Apple, Nvidia, and Tesla.
"The bubble in speculative froth has popped," Hartnett said, highlighting that the ongoing breakdown in Ark Invest's Disruptive Innovation fund is closely tracking the descent of Invesco during the 2000 dot-com unwind. Ark's Cathie Wood defended her fund's investment strategy this week and estimates big gains ahead.
Finally, investors shouldn't get too excited about short-term rallies in the stock market after big sell-offs, as they tend to serve as head fakes to bullish investors during a declining market. According to Hartnett's analysis, the Nasdaq staged 11 "dead cat bounces" with rallies as high as 45% between April 2000 and August 2002, well before the stock market bottomed in October 2002.
Since the Nasdaq fell about 5% in late November, it has since rallied as much as 4.5% before continuing slightly lower, representing a dead cat bounce if it doesn't hit record highs in the near future.