- Bank of America analysts project a “risk asset melt-up” in the first quarter of 2020 as global market risks fade away.
- The UK’s general election and the “phase one” trade deal between the US and China remove key sources of market uncertainty heading into the new year, the analysts wrote.
- Continued liquidity injections from the Federal Reserve and European Central Bank also support a global run-up in the first quarter, the bank added.
- The analysts predict the S&P 500 will hit 3,333 by March 3, implying a 5.2% jump from Friday’s close.
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Several events from recent weeks are set to drive the stock market higher through the first quarter of 2020, Bank of America said.
The analysts project the market to jump more than 5% by March in a “risk asset melt-up.” The UK’s general election and a “phase one” deal between the US and China eliminate much of the trade uncertainty plaguing investments through 2019. Central banks are also positioned to prop up markets through capital injections, the analysts added.
Returns in the new year will be “front-loaded,” BofA said, citing a 3,333 target for the S&P 500 index by March 3. The analysts also see the 10-year Treasury yield hitting 2.2% by February 2.
The targets imply a 5.2% jump for the stock index from Friday’s close, and a 36-basis-point rise for the Treasury bond.
Here are the three drivers for the first-quarter bull run, according to BofA.
‘Phase one’ trade deal
Global stocks surged to record highs on Friday after the US and China agreed on a “phase one” trade deal before new tariffs were slated to go into effect Sunday. President Trump confirmed Friday that the US would pull back duties against Chinese imports as part of the deal, easing pressures that drove stock volatility since the conflict began in July 2018.
The interim deal resolves a significant “global macro tail risk” and removes “risk premiums” from the 10-year Treasury and the S&P 500, the analysts wrote. The pause on further tariff escalations marks a major step in resolving the trade war, and helped push the bank’s sentiment indicator to an 18-month high on December 12.
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Last week brought clarity to another global economic boon, with the UK’s December 12 general election yielding an overwhelming Conservative Party majority. Boris Johnson emerged victorious despite previous defeats in passing his Brexit agenda, and pledged to expedite the process of separating the UK from the European Union.
“It does look as though this One Nation Conservative government has been given a powerful new mandate to get Brexit done,” Johnson said after winning his Uxbridge seat.
The prime minister is expected to reintroduce his Brexit bill before Parliament takes a holiday recess. Though the legislation is unlikely to see a vote before the new year, the new Conservative Party majority removes much of the uncertainty around Brexit and the form it would take.
A Brexit resolution, when coupled with the easing trade tensions between the US and China, demystifies some of the global risks dragging stock markets lower, the analysts said.
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