The team led by Michael Hartnett, the chief investment strategist at Bank of America Securities, says they are “bearish” on the market given the “shock” on interest rates looming next year.

In a report distributed this week to his clients, Hartnett estimates that inflation will push rates up, with the potential risk that the Federal Reserve continues to toughen its policy to avoid rising prices, even if Wall Street begins to suffer. This occurred in line with what was experienced in the current year, characterized by the boom for equities and many other assets.

“We know that the sensitivity of asset prices to central bank liquidity has been extremely high in the last decade and that a tapering (reduction in asset purchases) global, “he explains in his analysis. In it he highlights that, although corporate profits have soared, the withdrawal of central banks will begin to put pressure on earnings per share. “Therefore, we are bearish and we believe that capital preservation will grow as an issue in the coming year,” he justifies.

In a previous note, Hartnett already warned that the tightening of Fed policy would affect a succession of asset classes, with credit and cryptocurrencies such as bitcoin being the “next dominoes to fall”. Given this scenario, Hartnett expects a “rate shock” in 2022 to follow the “inflation shock” in 2021. The result will be “low / negative asset returns. [y] volatile “for the year.

That is why he recommends long positions on the US dollar, volatility and quality defensive stocks, including consumer staples, telecommunications and big pharmaceutical companies. It also recommends oil and energy as well as real assets. He is also confident that he will bet against copper and semiconductors.

For those looking to the contrary, the Bank of America expert looks at gold, emerging markets, commercial real estate, Chinese credit, small-cap value stocks, and “income streams in commodity markets.” due to the “weakening of the dollar” as some of the opportunities. He also likes position against the Nasdaq, as this indicator is exposed to rising interest rates and greater regulation from Washington.

On this last point, Hartnett warns that the greatest risk for next year derives from “lthe mother of all bubbles in crypto and technology “.

Although Hartnett frowns on equities, the BofA economics team expects “robust GDP” growth in the United States and around the world. China could be an “outlier” with a somewhat slower pace. However, from an investment standpoint, the equity team sees a “similar backdrop to the early stagflation of the late 1960s and early 1970s.”

Strategists at BofA Securities also pose a bullish scenario, in which the stock market could rise if the Fed makes it clear that it will keep rates low regardless of inflation. That said, your base scenario advocates a Fed that will push rates higher even if there is a market correctionwhile bond watchers return to the fray as Washington continues to increase public spending.

“The most extreme downside risks include a drop in crypto derivatives, geopolitical events related to China and Taiwan, and the withdrawal of the liquidity surge leading to credit risks,” Hartnett warns.