Fiscal excess, the power of Main Street, and US 'debasement': Here are the themes BofA says will dominate markets for the rest of this decade

• The era of easy money is over, and new trends will dominate global markets in the coming years.
• Bank of America strategists listed out a handful of themes to watch amid a new market regime.

Global markets are in the midst of a seismic shift.

Central banks around the world are raising interest rates up from 5,000-year lows, and that's ushering in the end of abnormally high returns for stocks and bonds.

And that's just one of the pivotal trends that will define the rest of this decade, according to Bank of America.

In a note on Friday, analysts at the bank pointed to a handful of big investment themes that will characterize the rest of the 2020s. Notable shifts from the 2010s compared to this decade include the shift in emphasis from the the so-called 1% to the other 99% of earners, gains concentrated in stocks and bond shifting to cash and commodities, and the change in the balance of power from capital to labor.

The COVID-19 pandemic and Russia's invasion of Ukraine have accelerated secular themes of the 2020s such as de-globalization, the firm's strategists wrote in the note.

War is expensive and inflationary, and the conflict in Ukraine has ramped up US and European Union policies in energy and defense spending. Sanctions, embargoes, and protectionism for food and energy supplies, in turn, have resulted in a reversal of globalization trends that have been dominant for much of this century and during the 1990s.

Markets should also watch for the shift from Wall Street to Main Street, which will last for years to come, according to Bank of America.

In the analysts' view, this means that the remainder of the decade could bring further policies of redistribution, regulation, and reshoring to reverse wealth inequality and put everyday traders back in the driver's seat.

"Buy what Main St buys," strategists noted.

US Treasuries, meanwhile, are on course for their third consecutive year of losses, which has never happened before. Bond investors now need hard-landing data and bull-price action, BofA said, to make their holdings the "biggest trade" of 2024.

If bond yields don't fall as expected, however, the "risk is dollar debasement fears return causing US dollar gains to reverse."

In the prior decade, deflation assets like bonds and tech gained about 10%, while inflation assets such as cash, commodities, and value gained 6%. So far this decade, the sectors have gained 5% and 4%, respectively.

"We sell US dollar & deflation assets such as IG bonds & monopolistic tech/growth stocks into coming recession, we buy inflation assets such as commodities, real estate, value cyclicals as recession begins," strategists said.

Central bank policy

The backdrop to all this has been the actions taken by global central banks, led by the US Federal Reserve.

"Revolutionary central bank policy" of the last 15 years included 1,343 rate cuts and $23 trillion of asset purchases since the Great Financial Crisis, strategists said, and has resulted in a Fed balance sheet that amounts to 31% of GDP.

"Central bank liquidity supernova caused big asset price inflation, boomer-to-millennial wealth transfer, and in recent years subsidized massive US, UK & European government spending," BofA strategists said.

Now, central banks are moving to reduce liquidity, and it's down $4.6 trillion since last February, which has led most investors to believe the next negative economic or financial event will be met with another "bout of Fed/central bank panic," in the firm's view.

But as with other dominant themes of the 2010s, the monetary excess of central bankers is set to be replaced. That shift will be characterized in this decade by fiscal excess on the part of governments, which are racing to roll out policies to fight climate change and reshore whole industries after decades of globalization.

The combination of central banks' monetary excess and governments' fiscal excess of the last three years has pushed nominal US GDP 40% higher since its pandemic low in the fourth quarter of 2020.

It's been the fastest expansion in about 70 years, and explains why inflation has proved so sticky, the bank said.