Sell the vaccine? Bank of America warns that good Covid news could be bad for markets

Published Fri, Feb 19 20211:21 PM EST

Good news in the form of greater vaccine distribution could be bad news for investors, according to Bank of America chief investment strategist Michael Hartnett. As the U.S. inoculation program against Covid-19 accelerates, Hartnett warns that the progress, combined with a variety of trouble signs, could conspire against the U.S. equity market, particularly in the earlier part of the year. Investors should "watch for [a] 'good news is bad news' narrative," he said in a note sent to clients. The term refers to caution that when conditions get too robust, as it can be a contrarian sign that the best scenarios are already priced into the market and it's time to pull back. The S & P 500 is up 78% from its March pandemic low in anticipation of a reopening of the economy. For reference, Hartnett points to the performance of the Israeli stock market along with mid-cap stocks in the U.K. Israel has been far and away the global leader in vaccines, providing jabs for nearly 82% of its population, according to Our World in Data. Yet its stock market performance has been mediocre of late. After getting a quick start on the year, the TA Main 125 index , the principal barometer for Israeli stocks, is down more than 2% from the Jan. 20 peak. The U.K. also has been a leader in vaccines, covering 25% of its population. Its mid-cap index also has shown a slowdown despite what would be considered good news in terms of reversing the pandemic's devastating effect on smaller European companies. Hartnett said both indicators are "stalling on good news." He said the same thing could happen in the U.S., which has been doing considerably better on vaccinations and now ranks fourth in the world with 17.3% of its population getting shots. There are other trouble spots, relating to other policy moves associated with efforts to combat the virus. Congress has unleashed more than $3 trillion so far in stimulus and is weighing President Joe Biden's proposal to spend $1.9 trillion more . The Federal Reserve has locked its benchmark borrowing rate in at near zero while continuing to buy at least $120 billion in bonds a month and vowing to keep the policy pedal to floor until significantly more progress is made in the labor market. Put it all together, and Hartnett said it adds up to the "mother-of-all policy bubbles." He notes that it's not just the Fed – global central banks have been buying on average $1.1 billion of assets every hour since the pandemic hit in March, bringing the Fed's $7.5 trillion balance sheet to 36% of GDP while expansive fiscal policy has pushed the federal budget to 32% of GDP. In turn, that has helped form the "mother-of-all asset bubbles" due to fiscal "policy overshoot inciting Wall St price overshoot," Hartnett said. He added that this situation differs from the warning former Federal Reserve Chairman Alan Greenspan sent in 1996 about "irrational exuberance" in that the central bank actually "wants Wall St irrational exuberance." As a result, he said a greater than 10% correction is likely in both the stock and credit markets "as DC overshoot = Wall St overshoot = Main St inflation overshoot = higher bond yields, or lower US dollar." "Either way we think big trends of '21 are higher rates, higher commodities, higher China renminbi," Hartnett wrote. Finally, he cautioned about the "3Rs" of higher rates, more regulation and "aggressive redistribution" of wealth that will reverse the low rates and high profits of the past decade and cause a bear market in tech stocks and corporate bonds. Bank of America has set a 3,800 price target for the S & P 500 this 2021, which would indicate a nearly 3% decline from Thursday's close.

Good news in the form of greater vaccine distribution could be bad news for investors, according to Bank of America chief investment strategist Michael Hartnett.

As the U.S. inoculation program against Covid-19 accelerates, Hartnett warns that the progress, combined with a variety of trouble signs, could conspire against the U.S. equity market, particularly in the earlier part of the year.

Investors should "watch for [a] 'good news is bad news' narrative," he said in a note sent to clients. The term refers to caution that when conditions get too robust, as it can be a contrarian sign that the best scenarios are already priced into the market and it's time to pull back. The S&P 500 is up 78% from its March pandemic low in anticipation of a reopening of the economy.