The United States is "just one step away from an economic recession"! Bank of America recommends buying long-term US bonds and is optimistic about Chinese and European stocks.

Bank of America Corp strategist Michael Hartnett recently commented on the current economic situation in the United States, stating that after five years of fiscal expansion, the US economy is beginning to enter a "government withdrawal" phase. He recommends investors to buy 30-year US Treasury bonds and sell UK, EU, and Japanese bonds. With the cooling of the "American exceptionalism" trade, the strategist also sees potential in international stocks, especially Chinese and European stocks. Hartnett pointed out that indicators suggesting economic sluggishness include weak growth in government and quasi-government sector employment, as well as an increase in the US household savings rate due to diminishing confidence in fiscal aid. Government and quasi-government employment growth accounted for a significant portion of US job growth in January 2025. Hartnett warned that the US is "one step away from an economic recession" and hinted that US Treasury bond yields may fall below 4%, which he believes many investors are not prepared for. He emphasized that historically, when non-essential spending relative to essential spending peaks, this is often a worrisome signal for the S&P 500 index. Hartnett also recommended selling UK and EU bonds. He noted that German and UK bond yields have surged to 15-year and 27-year highs, respectively, possibly driven by increased defense spending in the region. He predicted that German bond yields may surpass US bond yields by the end of the year and pointed out that the UK may face a public debt crisis due to budget and current account deficits, which is a key driver of peak risk sentiment in Europe. The strategist also advised selling Japanese bonds. With 30-year Japanese government bond yields at a 17-year high and the Bank of Japan lagging behind in adjusting policy rates, Hartnett believes Japan's financial situation needs to tighten, either through raising Japanese government bond yields or strengthening the yen. He expects the Nikkei index to underperform until the Bank of Japan significantly tightens policies to restore credibility. Regarding the stock market, Hartnett stated that the "strong seven giants" of US stocks have now turned into the "weak seven giants" as the market value of these stocks has dropped by $3 trillion to $15 trillion. Meanwhile, the market capitalization of China's "big four" - Baidu Inc Sponsored ADR Class A (BIDU.US), Alibaba Group Holding Limited Sponsored ADR (BABA.US), Tencent (00700), and XIAOMI-W (01810) - has doubled to $1.6 trillion, and the European stock market is catching up. According to Bank of America Corp's latest report, for the week ending March 5, global fund flows showed investors continuing to prefer cash, with inflows of $53.1 billion, compared to $22.9 billion inflows into stocks, $12 billion into bonds, and $1 billion into gold. European stock markets attracted $4.1 billion, the largest inflow since February 2022, while emerging markets attracted $2.4 billion, the largest inflow in three months. Technology stocks saw inflows for the first time in five weeks, amounting to $2.6 billion. Gold saw the largest four-week inflow ever, reaching $9.9 billion, while cryptocurrency funds saw the largest four-week outflow ever, reaching $3.6 billion. Hartnett emphasized the structural shift in global markets, noting that the "by any means necessary" rearmament in Europe will drive fiscal expansion in the EU and UK, while in the US, actions by the Department of Government Efficiency (DOGE) led by Elon Musk are leading to "new fiscal austerity." Bank of America Corp strategists are bullish on international stocks, especially Chinese and European stocks, as the "American exceptionalism" appears to be reaching its peak. They stated that the next market trade is a "weak dollar" trade and added that investors should "slightly buy oversold US semiconductor stocks" and invest in underperforming Indian stocks.