Why Wall Street’s biggest bear is worried about property and PE

Hartnett’s radar has been a bit less accurate in 2023 – like many strategists, he missed the January rally and his recent call for the S&P 500 to fall to 3800 points by March 8 looks unlikely after the index jumped 1.6 per cent on Friday night to 4045 points.

But he’s sticking by two key views.

Firstly, he argues that history says bear markets don’t end until the Federal Reserve breaks something. Whether it’s the subprime crisis in 2007–08, the dot com bubble bursting in 2000, the 1987 crash or nine other events going back to 1915, a Fed rate hiking cycle always ends in a credit event.

And this time, Hartnett says that’s probably going to occur in real estate or private equity.

The crunch in Anglo-Saxon residential real estate is on in earnest, with prices down between 13 and 5 per cent in the US, Britain, Canada, Australia and New Zealand. But there are also pockets of pain in the office property market. And, while private equity is sitting on huge amounts of dry powder – about $US3.7 trillion ($5.5 trillion) – there is a clear slowdown in deals (particularly sales of businesses) as higher rates push debt costs up and asset prices down.

More than this though, Hartnett argues that what we are seeing is not a cyclical shift to higher rates, but a structural one.


“War, globalisation, fiscal excess, bailouts, net zero [mean] higher inflation and rates,” he says in his latest missive. His “secular script” is reproduced below:

  1. An era of extraordinary monetary policy (lowest rates of 5000 years) is over
  2. Inflation is a secular reality not a cyclical theme
  3. Governments have poor balance sheets, must pay higher yields to attract finance
  4. The combination of higher inflation and higher interest rates leads to a mean reversion in equity valuations
  5. The end of a necessary bear market will coincide with a credit event; until then, cash as good as bonds and stocks

Clearly, this is bearish for the long-duration assets that love low interest rates and have been smashed over the past 12 months – tech stocks, private equity, credit, and Hartnett says, the US in general.

But he does sketch out a playbook to prosper in this new secular reality.

First, he suggests investors should own “solutions to the problems that society wishes to solve” such as companies involved in infrastructure, solving inequality and helping address climate change. You might throw in companies whose products and services help address inflation, too.

Second, Hartnett says the losers of the last decade should be winners as rates rise: value stocks, banks and Europe, where high savings rates mean higher rates are actually positive.

Hartnett’s script may not be right. But his big-picture view, that we simply don’t gently wash out more than a decade of excess with a gentle soft landing, needs to be a risk investors are actively considering.