5 defensive trades to make if stagflation and hard-landing fears cause a stock sell-off, BofA says

Bank of America’s Michael Hartnett suggests taking defensive measures in the face of potential stagflation and a stock sell-off. Hartnett warns that investor optimism is high, but sentiment is overextended. To hedge against these risks, he recommends five trades. These include favoring cash over stocks, REITs over commodities, UK and China over Europe and Japan, utilities over tech, and discretionary over healthcare. Hartnett emphasizes that stock markets could face a downturn if stagflation or recession anxiety resurfaces.
According to a recent survey by BofA, investor confidence is currently at its highest level since late 2021. This optimism is largely driven by the belief that the Federal Reserve will reduce interest rates in the latter half of 2024. The survey found that 78% of investors expect the bank to implement at least two rate cuts within the next year, with 82% anticipating the first cut to occur in the second half of this year. However, Hartnett, a commentator, suggests that these high expectations make the current stock rally particularly susceptible to risk, as these metrics appear to be overextended.

Additionally, the survey reveals an increase in macro pessimism, with 9% of investors predicting a weaker global economy in the coming year. Concerns about stagflation are also present, as inflation remains a significant risk factor, while fears of an “economic hard landing” have intensified.