Da Vinci and 702 Rate Cuts Make BofA Bearish on Markets in 2018

(Bloomberg) -- The economy should surge next year. Markets, not so much.

That's Bank of America Corp.'s outlook for 2018. Strategists at the bank expect the U.S. economy to grow 2.4 percent next year, up from 1.5 percent in 2016. Meanwhile they forecast that stocks will peak mid-year, and then start to head lower, while U.S. Treasury yields jump. It's an assessment based in part on these striking numbers:

• Markets in 2017 had the 702nd global interest rate cut since Lehman Brothers's collapse
• Leonardo da Vinci's Salvator Mundi sold for $450-million last month at Christie's
• The price for digital currency bitcoin hurtled past the $10,000 milestone
• The Bank of Japan and ECB have bought up $2 trillion of financial assets this year

Bank of America also cited yields of European speculative-grade bonds that fell below those of U.S. Treasuries, and S&P 500 volatility levels sinking to 50-year lows.

These figures signal that the long bull-market run is nearing its end, and BofA Merrill Lynch Global Research analysts forecast profits and liquidity peaking, sparking a mid-2018 market pullback. This late stage phase of positive and improving economic growth also augurs higher risk, according to the bank.

That said, for well-positioned investors these “last gasps” of the cycle will offer some of the best returns, according to the research.

“Investors are chasing growth and high-yielding assets in a bull market that's been driven and enabled by central bank liquidity,” Michael Hartnett, head of global investment strategy at BofA Merrill Lynch Global Research, said in a statement. “We see an end to this Icarus trade and an aggressive downgrade of risk assets once profits peak, investor positioning becomes excessively enthusiastic and central banks start withdrawing liquidity as they scale back support.”

Among the bank's 2018 predictions are modest credit returns, a stronger dollar, higher levels of volatility and tighter credit spreads. Inflation is likely to be the “big story of the year,” particularly in the U.S. Economic growth may be stronger than expected because of U.S. tax reform according to the bank.

“Our overall outlook for the year ahead is macro bullish, so much so that we're ultimately market bearish,” said Hartnett.

To contact the reporter on this story: Sally Bakewell in New York at sbakewell1@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins

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