Asset price inflation will “flip from Wall Street to Main Street” after coronavirus lockdowns end, strategists at Bank of America have forecast, as they predict investors will move out of stocks and bonds and into collectibles, commodities and even diamonds.
In a research note, the bank’s strategists argued that the release of “pent-up savings” combined with a government stimulus plan in the US will create a run on inflation caused by factors such as supply bottlenecks and higher food and energy prices. “Real assets will outperform financial assets,” they wrote.
Since 1950, according to BofA, prices of commodities, platinum, property and diamonds have been most correlated with accelerating inflation, with long-term government bonds doing the worst.
Fans of such “reflation trade” arguments often point out that stocks and bonds could suffer as consumer price indices rise. Inflation erodes the cash value of coupons paid by bonds, which could encourage a sell-off of assets such as US Treasuries.
This would push up Treasury yields, influencing investors to demand higher earnings yields from stocks and depressing equity valuations that have hit record highs.
Financial markets are forecasting faster inflation, while the US central bank has said that any bump in prices as the economy recovers will be temporary.
Meanwhile, a debate is raging over whether US president Joe Biden’s multitrillion dollar coronavirus relief and infrastructure spending package will cause the world’s largest economy to overheat.
The 10-year break-even rate, a market measure of future US inflation, is running at around 2.2 per cent.
Federal Reserve chair Jay Powell said this week, however, that any inflation bump in the US would be “neither large nor sustained” because America’s labour market remained weak.
Another senior Fed official has said that strong disinflationary forces from globalisation and technology will keep prices subdued.
Christopher Wood, strategist at Jefferies, said that even if the Fed did not respond to an overheating economy by raising interest rates, “the prescription from the progressive wing of the Democrat party will be to address it with higher taxation”, which would also be bad news for share prices.
“The risks are building for obviously overvalued US equities,” Wood wrote in a research note.