This 'sleep like a baby' portfolio strategy is having its best year in nearly a century, BofA's Hartnett says

Bank of America says a four-way split across stocks, bonds, cash and commodities has had its best year since 1933 and is outperforming the traditional 60/40 portfolio by the third-largest margin ever. The bank highlights strong gains in commodities, with U.S. crude oil up more than 60% and the S&P 500 up over 4%, while cash continues to earn decent yields and bonds are roughly flat. Hartnett argues investors should raise exposure to commodities and natural resources as markets price in a nominal growth boom, AI-related chip demand, and geopolitical disruptions.

Analysis

The market is rewarding assets that benefit from a steeper nominal-growth regime: commodities, value-linked cyclicals, and balance-sheet-sensitive rate trades. The second-order effect is that this is not just an asset-allocation story; it is a cross-asset reflation bet where the winners are the sectors that monetize scarcity, pricing power, and duration optionality, while long-duration defensives lose relative appeal even if headline indices keep grinding higher.

The most underappreciated implication is that commodities are no longer just a hedge against inflation spikes; they are increasingly a hedge against geopolitics and strategic industrial policy. If governments continue to treat energy, chips, and critical minerals as national-security inputs, then capex, inventories, and reserve-building become structurally supportive for miners, drillers, and industrial suppliers over the next 6-18 months, with volatility compressing on pullbacks because policy actors now have an incentive to defend domestic strategic chains.

Consensus may be underestimating how much of this rally is being built on positioning rather than fundamentals. Elevated hedging despite higher equity indices suggests investors are participating but not fully committed, which often leaves room for a squeeze if macro data stays constructive; however, that same fragile sentiment means the trade can unwind quickly on any growth scare, ceasefire, or policy turn toward disinflation. The key reversal risk is that a commodity-led nominal boom can stall if tighter financial conditions or a stronger dollar reassert themselves, especially if earnings breadth fails to improve beyond a narrow group of cyclicals and semis.

Key Decisions for Investors

• Add a tactical long basket of XLE/XOP vs. XLU on a 1-3 month horizon; risk/reward favors energy cash-flow leverage if oil volatility stays bid, but trim if crude retraces 10-15% from current levels.
• Express the steeper-nominal-growth view via TBT or short duration proxies against IEF on a 3-6 month horizon; the payoff improves if markets start pricing a harder-for-longer policy path tied to commodity resilience.
• Go long FCX and a diversified critical-minerals proxy against materials laggards on a 6-12 month basis; the thesis is that strategic inventory demand can extend the cycle even if China demand is mediocre.
• For equities, own SMH selectively and pair it with a short in a low-quality software basket over 2-4 months; semis retain policy support, while software remains the cleanest long-duration multiple risk if rates stop falling.
• Sell downside put spreads on BAC over the next 6-8 weeks rather than outright chase the stock; the positioning message is constructive, but upside should be capped unless the steepener trade and cyclicals broaden materially.