BofA warns that US politics is fueling a Wall Street price bubble

By Michael Msika


Bank of America Corp. strategists warned that the “extreme rally” on Wall Street that has driven stocks to record highs, fueled by strong US policy stimulus, is forming an asset price bubble.

“DC’s political bubble is fueling Wall St’s asset price bubble,” the strategists led by Michael Hartnett wrote in a note on Friday. “When those who want to stay rich start to act like those who want to get rich, it suggests a late speculative burst.”

Strategists predict a market correction and positioning that will peak in the first quarter, with the BofA Bull & Bear indicator approaching a “sell signal”.

Soaring market prices as investors boost inflation-linked trades will drive ‘Main Street inflation’ higher, risking a conical crisis, tighter financial conditions and volatility events, warned the strategists. They highlighted past bubbles, including the dot-com era and the housing market in 2007-2008.

Bloomberg

Risk assets rallying to vaccine prospects are getting a boost this year on bets that a victory for US Democrats in the Senate will spur further fiscal stimulus, adding to Federal Reserve largesse. The S&P 500 index has jumped more than 70% since its March low, while the Nasdaq 100 nearly doubled and Bitcoin climbed above $30,000.

Central bank balance sheets swelled in 2020, reaching record size for the Fed and the European Central Bank. BofA expects the Fed’s balance sheet to hit 42% of US gross domestic product this year, while predicting the country’s budget deficit will hit 33% of GDP.

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