BAML: '2 factors that can make the 'greatest bull market of all time'

Bank of America Merrill Lynch has identified what it views as the two catalysts that can keep the almost nine-year bull market going strong.
The current run is already the second-longest ever, and it needs to go roughly 1,200 more days without a 20% drop to become the king of all bull markets.
Michael Hartnett has made it no secret: He thinks the almost nine-year stock bull market is on its last legs.

For the past several months, the chief investment strategist at Bank of America Merrill Lynch warned against the so-called Icarus trade, which he defines as a reversal of the "melt up" seen in stocks since early 2016. Right before the stock market's recent 10% correction caught many traders off-guard, he issued a strong sell signal. He's even gone as far as to outline a four-part formula for a market meltdown.

Yet while Hartnett's bearish side has driven much of his recent commentary, he still sees a way for the stock market's ongoing rally to become the "greatest bull market of all time." At more than 3,250 trading days, it's already the second-longest on record. All it needs is roughly 1,200 more days without a 20% drop to become the king of all bull markets.

Hartnett pinpoints two specific drivers that could take the benchmark S&P 500 to the promised land:

"An unanticipated surge in productivity growth"— Weak productivity growth has confounded economists over the past few years, yet a recent study from the McKinsey Global Institute suggests it could see a turnaround. This is crucial to the longevity of the bull market because it helps neutralize rising inflation, which is frequently cited as a major concern for investors.

"A speculative bubble from a Great Rotation out of negatively yielding debt into stock markets"— BAML has frequently referred to the "Great Rotation" since coining the term in 2011, and it refers to investors pulling money out of bonds and reallocating them to stocks.

But don't think Hartnett is going soft on his bearish market outlook. Even if a perfect combination of factors pushes stocks higher, he argues the "last great entry point" into stocks came more than two years ago, on February 11, 2016.

Overall, Hartnett's core stance is to stay cautiously optimistic when it comes to stocks — a view matching what BAML's global team has been saying. In late January, James Barty, the firm's head of global cross-asset and European equity strategy, warned that markets were "starting to get a little stretched," while urging caution.

With all of that in mind, investors would be advised to proceed warily. After all, the 10% correction that rocked US equities in early February was jarring for many traders who probably wish they'd been better hedged.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

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