“Arguably the only reason to be bullish risk assets right now is there are no reasons to be bullish.”
In a note to clients on Wednesday, Bank of America Merrill Lynch strategist Michael Hartnett gives a deeply contrarian reason for liking risk assets — like stocks — right now.
Namely, the reason is that there are no reasons.
Harntett highlights the following chart showing the divergence between high-yield bonds and the stock market, which first emerged last year and was never resolved.
In recent weeks, however, high-yield bonds have been falling again, but as Hartnett notes, of the 36 sectors in the high-yield market, only 5 have seen total return losses this year: metals & mining, paper, aerospace, energy, and steel.
Hartnett adds, “That said, our tactical sentiment signals flashed ‘buy’ in July, and remain contrarian ‘bullish’ as shown by the latest ‘fear’ reading on our cross-asset Bull & Bear Index.”
“True, our tactical buy signals are being blunted by two significant events: the start of a Fed hiking cycle; and the start of a Chinese devaluation cycle. But bearish positioning is a necessary condition to create a low in risk assets.”
So the only reason not to hate the market is that the market is only giving you reasons for hating it. Got that?