Bank of America's Hartnett says higher rates are breaking tech, sell any bounce

Published Fri, Jan 21 202212:08 PM EST

The Federal Reserve is losing the battle with inflation and will need to raise interest rates even faster than it is planning, a situation that endangers tech stocks in particular, said Bank of America's Michael Hartnett. Ahead of its two-day meeting next week, the central bank will have to confront the reality that it is "hysterically behind-the-curve" regarding the need to tighten policy, Hartnett, the bank's chief investment strategist, said in a note for clients. In fact, Hartnett said policymakers are being too timid when it comes to using interest rates to control inflation. Fed officials in recent days have indicated they are likely to enact a 25-basis-point — 0.25 percentage point — increase to the central bank's benchmark overnight borrowing rate. But Hartnett said the Fed really should be considering a 50-basis-point move. Along those lines, Hartnett said a "'rates shock' is just beginning and rate expectations [are] too low." He added that pushing down inflation this year will require five or six hikes, rather than the three indicated when Federal Open Market Committee members released their most recent projections in December. Higher rates hurt big-growth tech stocks as they make future earnings less lucrative. Hartnett said Bank of America is shorting tech stocks specifically and the Nasdaq index broadly "on higher rates/bloated weightings." The strategist pointed out that 14,000 is a "supremely important level to hold in" the first quarter for Nasdaq, which historically has been home to the market's tech heavyweights. That level is just 1.1% below Thursday's close. "There will be rips higher," in the sector, Hartnett said, but he advised clients to "sell 'em." Market views on hikes Markets are pricing in a more aggressive Fed, though not quite to the extent that Hartnett advocates. Traders are assigning only a slight chance for rate action at next week's meeting, but see a 91.6% probability of a quarter-percentage-point move in March, according to CME's FedWatch data through Friday morning. They see just a 5.1% chance of 50-basis-point move, though sentiment for a more aggressive hike has been growing, with hedge fund executive Bill Ackman most recently supporting the idea. The market is fully pricing in four rate hikes by the end of 2022, with the funds rate now implied at 1.07%. By the CME's calculations, that equates to about a 35% probability for five increases this year. However, the market hasn't had to deal with an inflation-fighting Fed since the early 1980s, making the current situation more unpredictable with central bank's current intention to raise rates slowly, said Hartnett's colleague, Ethan Harris, who is a global economist for Bank of America. "A central bank that signals that it will taper a bit faster and could exit zero rate six months from now is hardly fighting inflation," Harris wrote. "The most likely get tough scenario would mean an initial slow start for the Fed — perhaps hiking 25bp in March, skipping May and then hiking in June. But if they were to get more serious, six hikes this year and a terminal funds rate of 3% seems plausible," he added. Current market pricing is for a funds rate that rises to just 2.04% by the end of 2026, a gentler path than even the current Fed forecasts.

Federal Reserve Chairman Jerome Powell testifies during the House Financial Services Committee hearing titled Oversight of the Treasury Department's and Federal Reserve's Pandemic Response, in Rayburn Building on Wednesday, December 1, 2021.

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