As interest rate hikes begin to bite harder and the U.S. economy faces the prospect of recession, investors face another year of heightened volatility and tough choices. Bank of America strategists see risks of a Federal Reserve policy mistake in 2023 that could generate a “hard landing” for an economy trying to fight through elevated inflation. The bank’s investing team has come up with 10 moves that investors can make to protect themselves against challenging conditions. Atop the list is a bet on the 30-year Treasury bond, which has gotten pummeled in 2022 amid rising interest rates and expectation for weak growth. In fact, the long bond has lost 35% this year, resulting in its worst decline in more than a century, according to BofA. However, the strategists see conditions more favorable next year due to “recession, unemployment, Fed cuts late ’23.” On top of that, Treasury returns have never been negative three years in a row, wrote Michael Hartnett, the bank’s chief investment strategist. The bank also favors global industrial stocks as well as small caps. That strategy is a bet on “secular leadership shift in 2020s from deflation to inflation assets, driven by globalization to localization, monetary to fiscal excess, inequality to inclusion and so on just beginning; capex set to be new macro bull story,” Hartnett said. Another idea is to go long gold and copper. The former is a classic inflation hedge while the latter is seen as an industrial bellwether. Hartnett likes the trade based on a peak in the U.S. dollar along with “China reopening, metal inventory shortages, energy transition acceleration.” Similarly, BofA recommends shorting the U.S. dollar, which has risen nearly 9% year to date as the Fed has boosted its benchmark borrowing rate by 4.25 percentage points. Part of that trade is also to go long emerging market assets, which have been hurt by the stronger greenback. Specifically, the bank recommends emerging market distressed bonds, the Korean won currency, the reopening in China and the Mexican peso. Bank of America has a 4,000 price target on the S & P 500 for 2023, implying just a 2.7% gain from Thursday’s close. — CNBC’s Michael Bloom contributed reporting
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