Another key theme cited by Bank of America is the shift from an economy that has provided a decade of success for Wall Street to something that is more likely to help Main Street.
Hartnett and his team observed that the value of financial assets (Wall Street) relative to the value of the economy (Main Street) rose in the 2000s. But the next decade may favor businesses and workers on Main Street. Bank of America expects “structural policies” from regulation to reshoring will help US companies, “reverse wealth inequality, and raise the value of work.”
Moreover, politicians are likely to favor Main Street voters’ “desire for increased government spending” over Wall Street’s calls for fiscal discipline, Hartnett and his team write. This would enhance the value of the Main Street economy relative to Wall Street financial assets.
Something that Bank of America did not note, but that supports this theory, is how the only wage growth across the inflationary economy came among blue-collar workers. And that doesn’t include the huge wage gains won by the unionized 10% of the economy, including UPS drivers and Big Three auto workers.
Bigger governments, bigger debts
Larger governments come with more debt. This is likely to be an influential topic in the 2020s, according to Bank of America. The US government deficit rose during the third quarter to 8% of GDP, and the national debt has now exceeded $33.7 trillion. It’s a path that may be unsustainable at some point, and investors must consider the consequences for bond yields.
Hartnett said the lack of fiscal discipline in Washington is “a big reason why bond yields have risen so much in recent years.”
“One new investment risk is that bond yields may need to rise to levels that cause greater discipline in fiscal spending,” he added, warning that 2024 is also “a huge election year that does not constitute a political incentive for discipline.”
The era of artificial intelligence and the era of regulation
The rise of artificial intelligence has already been an influential topic in the 2020s. Strategists at Bank of America believe that artificial intelligence will eventually boost worker productivity and increase profits, but the timing of this outcome remains uncertain.
“Bears will point out that from steam power to the Internet, there has always been a gap between innovation and widespread social, institutional, and economic adoption,” Hartnett and his team wrote.
AI may mark the beginning of the “Fourth Industrial Revolution,” but it is a “disruptive technology” that can also have negative impacts. Ultimately, Bank of America warns that the quickest way AI can increase productivity is to take workers away from their jobs.
The risks posed by artificial intelligence, coupled with the dominance of big tech giants over the past decade, could lead to increased antitrust regulation and scrutiny in the 2020s.
“The social inequality and wealth generated by technology disruption, the monopoly power of Big Tech, as well as the unintended consequences of increased artificial intelligence, clearly threaten individual dominance of the sector through increased regulation and taxation,” Hartnett and his team wrote. Hence, the sectors’ claims that they are considered a national security sector are increasing.”
Deflation to inflation
Finally, the 2000s were a decade of relatively low and stable inflation in the US, but Hartnett and his team believe this is now over. While the Fed has made some serious progress in taming inflation since it began raising interest rates in March of 2022, Bank of America experts said the central bank is likely to give up before the job is done.
“We believe the coming recession is sparking political panic long before inflation approaches the Fed’s 2% target,” they wrote.
For investors, this means that assets that typically perform during periods of low inflation and interest rates, such as technology stocks and growth stocks, could underperform assets that typically perform well when prices rise, such as cash, commodities and value stocks.
“In 2023, US deflationary technology/growth stocks rise, but we are selling a recession in 2023, and will buy inflation assets such as commodities, real estate, and value cyclicals as the recession begins,” Hartnett and his team wrote.