This rally may be a repeat of 2008’s ‘Bull Trap,’ says Bank of America

While investors are enjoying the beginning of a new technical bull market, Bank of America (BofA) strategist Michael Hartnett urges caution.

This rally, Hartnett argues, resembles a textbook bull trap much like the one that led to the dot-com crash and to 2008. So he’s not convinced yet that it’s a “brand, new shiny bull market.”

“The current market looks more like 2000 or 2008, with a “big rally before [the] big collapse,” Hartnett wrote in the bank’s weekly report.

Hartnett’s track record: an early bear

Michael Hartnett has earned his reputation as a sage on Wall Street. Last year, when optimism was rife, Hartnett stood apart as an early bear, correctly calling a market sell-off.

But 2023 turned out to be something of a blind spot for him. He predicted the S&P 500 would drop to 3,800 in February, but his call was largely off the mark that time.

Hartnett attributed his misjudgment to three factors he failed to anticipate.

That the economy and earnings would avoid a recession. The collapse of Silicon Valley Bank, which could have led to a credit crunch, but was skillfully avoided through a federal bailout. And the sudden surge in AI stocks — an “unanticipated event” that took the market by storm.

Still, Hartnett continues to urge caution moving forward.

As a potential trigger, Hartnett points fingers at the Fed. If the Fed decides to further raise the interest rate target, the market could plunge into another sell-off.

Although the Fed has paused hiking for now, chair Powell made it clear that the inflation battle isn’t over. Its members foresee a few more hikes this year before taking a breather:

Interest rates can keep inflation in check, but they can also slow down economic growth.

In fact, JPMorgan analysts believe this inflation breakout won’t end without a recession. "Ultimately, a recession will likely be necessary to return inflation to target," JPMorgan analyst Marko Kolanovic wrote in a recent note.

💡 Here’s how it works: The Fed controls the interest rate at which banks lend money to each other—which, in turn, influences at what rate banks lend to businesses and individuals.

For stocks, rates have effects both on an economic and valuation level.

By raising rates, the Fed makes borrowing more expensive. This can force businesses to hold back on expansion or lead consumers to reduce spending—lowering corporate earnings.

In the meantime, on a technical level, interest rates chip at stock valuations because analysts have to discount future earnings at a higher rate.

Is the stock market in for another bull trap?

Even as the market rages in bull mode, some analysts think it's not time to let down our guard just yet —especially with elevated earnings and the Fed’s not being cool with inflation.

Did investors get ahead of themselves once again? The lessons from 2000 and 2008 serve as reminders that a technical bull market can just be the calm before a bigger sell-off.