Here's how to invest in 3 'tectonic shifts' that will shape markets over the next few years, according to BofA

  • Bank of America is seeing some oncoming market themes it expects to be very important.
  • The firm walked investors through patterns in interest rates and government spending.
  • It also explained how investors can buy into those monetary and political patterns.

Most days, there is more than enough markets news to keep any investor occupied with the here and now. But the big picture matters a great deal, even when it’s hard to focus on.

Bank of America says that market participants should keep an eye on three major trends that have been building over the last couple of years and could last for at least a few more.

“Stepping back from the daily ebb and flow of the markets, we see three major tectonic shifts that will likely determine and help drive asset prices over the medium term,” wrote Joseph Quinlan, the head of CIO market strategy for Bank of America Private Bank, and Lauren Sanfilippo, senior investment strategist, in a recent note to clients.

While big picture geopolitical patterns can be tough to invest in, Quinlan and Sanfilippo explained the sectors and assets that should benefit the most from the changes ahead.

Note: The stocks and ETFs mentioned in this story are examples of the options investors can use if they want to adopt these strategies. BofA isn’t recommending specific securities in its report.

(1) No more cheap money

It’s no secret that interest rates spiked in 2022 — it’s possible that nothing has occupied more of investors’ attention than the trajectory of rates in the last year-plus. But Quinlan and Sanfilippo say that the larger context matters, too. From 2008 to last year, ultra-low interest rates and central bank policy made for an era of easy money.

Today, not only are rates higher, a lot of other factors that contributed to easy borrowing are moving in the other direction.

“The era of ultra-low interest rates and QE is over” because of greater wage inflation, falling labor market participation, higher costs, tight supplies for critical commodities, and the replacement of globalization with “reshoring,” Quinlan and Sanfilippo wrote. “The benign era of declining or flat-lining global inflation is history.”

They said that will favor value stocks over growth stocks, and will make dividend-paying stocks and alternative investments more appealing. It’s also a potential economic challenge, as national debt levels have risen at the same time that interest rates have increased.

(2) Big government

Over the last few decades, Western governments were generally hands-off when it came to markets and private industries. Quinlan and Sanfilippo wrote that COVID-19, rising tensions with China, and the commodity market turmoil that followed the Russian invasion of Ukraine mean those days are emphatically over.

“Each one of these dynamics demands more government, not less, leaving business and the private sector flat-footed,” they wrote. “Led by the US, global foreign security goals and national interests are being fought not just with tanks and missiles but also with markets, currencies and strategic national resources.”

Now, governments are getting larger, and in many countries they’re encouraging domestic industries — and targeting rivals.

“We have entered a bull market in state intervention and activism,” Quinlan and Sanfilippo wrote. “Against this backdrop, the best defense for investors may be to invest in hard assets — minerals/metals/ag commodities — or assets whose scarcity is set to rise due to government intervention/protectionism.”

There are a few different routes to doing that. Investors can buy future of individual commodities such as oil, or indexes that track the prices of multiple commodities, like the iShares Bloomberg Roll Select Broad Commodity ETF. They can also buy stock in companies that produce or have substantial exposure to those commodities either individually, such as gold producer Newmont, or through ETFs like this one, which holds silver producers.

(3) New priorities

After the Cold War ended, the US and many of its allies enjoyed a peace dividend, as money that would have otherwise gone to the military was spent domestically instead. That paved the way for economic growth. even as military spending remained considerable.

Quinlan and Sanfilippo said those priorities are about to shift back to defense. That removes a tailwind to economic growth, but should have obvious benefits for defense conglomerates and companies focused on critical online infrastructure.

“Russia’s invasion of Ukraine and China’s growing military might have upended the global calculation,” they wrote. “In an era more fraught with geopolitical risks, we have and remain constructive on large cap US defense contractors and continue to favor cybersecurity leaders.”