GO LONG DEFENSIVES IN VACCINATED MARKETS, LONG CYCLICALS IN JAPAN & EMERGING

To Bank of America global investment strategist Michael Hartnett, there have been three distinct phases to describe market action over the last eight months. 

The first is what he labels the reopening rally, started on Nov. 3 by both the U.S. election and the reports of vaccine effectiveness. That boosted stocks and credit, steepened the yield curve, weakened the U.S. dollar, and led to cyclicals outperforming defensives.

The next phase was the inflation boom, started on Feb. 16 by blowout U.S. retail sales. That led to commodities rising, yields surging, cracks in the technology sector, and value stocks outperforming growth. 

The third phase was what he calls "peak growth/policy," starting on Jun. 16 by the Federal Reserve as well as easing signs from China. That led to a yield curve collapse, bonds outperforming stocks and commodities, the dollar rising, and defensives outperforming cyclicals. 

So what to do now? He says own defensive quality in the second half, as it is both a hedge against peak policy, and peak profits. He advises going

  long defensives in what he calls the vaccinated markets of the U.S. and Europe, 

and

  long cyclicals and reopening plays in markets with vaccine upside, in Japan and emerging markets.