BofAML: July 11 was more important than Brexit, Trump or the Fed

A trader takes a break on Wall Street outside the New York Stock Exchange.
Brendan McDermid | Reuters

When investors look back on the most significant event of 2016, it won't be June 23's Brexit vote or Donald Trump's Nov. 8 election victory, or even if the Fed's expected rate hike in December.

Instead, it will be July 11.

That was the day everything changed, at least according to the view of Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.

On that day, longer-term bond yields hit what Hartnett and a number of other market experts believe was a multidecade low, not expected to be seen again anytime soon.

The move was sparked by expectations that aggressive central bank monetary policy was about to be replaced by fiscal policy measures aimed at goosing the world's economy through big spending.

For investors, that means the end of a generational bond bull market and the beginning of a new regime.

"That day was the day that the greatest bull market ever in the bond market ended. Since then, yields have been rising. That without a doubt is the biggest event of 2016," Hartnett said Wednesday at BofAML's annual outlook for the year ahead. "Everyone was positioned for that to continue."

Like many others on Wall Street, BofAML had to rewrite the script after Trump won. The general theme of inflation, rising yields and fiscal stimulus expectations wasn't entirely new, but the degree could be something markets didn't expect.

The turn in bond yields was "a massive, secular inflection point" that will have major effects, Hartnett said.

The investing themes shift from globalism to protectionism, from a focus on Wall Street to one on Main Street, and from big, large-cap stock market names that everyone knows to small companies that may not be so familiar.

"Take your pick. But these rotations are very violent, and they've only just begun," Hartnett said.

As for specific levels, BofAML sees the rising to 2,300 by the end of 2017 — just a 4 percent gain from here — while the benchmark 10-year Treasury yield climbs to 2.65 percent in that time frame, or about a quarter-point from current levels, and the euro to edge closer to parity with the dollar at 1.05.

It doesn't sound like much, but Hartnett said it will be a rough ride getting there as investors deal with a new landscape.

"These are sort of moderate moves from where we are today, but they should mask tremendous volatility under the surface," he said.