Stocks Will Be Stuck On Fed Until A Recession Becomes Evident, BofA Says

Strategists say “crashy vibes” will worsen unless February payrolls are soft.
Stocks Will Be Stuck on Fed Until a Recession Becomes Evident, BofA Says
Stocks Will Be Stuck on Fed Until a Recession Becomes Evident, BofA Says

US stocks hanging on Federal Reserve policy signals are boxed in a “neurotic” trading range that will only break once economic data unambiguously point to a recession, Bank of America Corp. strategists say.

The rate hikes of the past year were not a prelude to a steady Goldilocks economy that’s running neither too hot nor too cold, but instead to a “hard landing and credit events,” strategists led by Michael Hartnett wrote in a note on fund flows pointing to another risk-off week in markets.

Investors pulled $500 million from equity funds and piled $18.1 billion into cash and $8.2 billion into bonds, according to BofA citing EPFR Global data for the period through March 8. The flows emphasize worsening market sentiment this week as worries about banks’ liquidity compound those on the Fed tightening policy more than previously expected.

With US payrolls data due later today, Hartnett said another hotter-than-expected report could worsen the “crashy vibes of March.” The strategist was correctly bearish through 2022 when he warned that recession fears would fuel an exodus from stocks, although his call last month that the S&P 500 would drop to 3,800 points by March 8 didn’t materialize.

Hartnett now expects the S&P 500 to trade in a range that implies the benchmark will gain 7% at best from Thursday’s close, and drop about 3% at the lower end, until US jobs growth stalls and the yield curve steepens, according to the March 9 note. The bond market is doubling down on recession bets, with the US yield curve inverting earlier this week to an extent not seen since the early 1980s.

Other strategists are also sounding the warning on equities. Morgan Stanley’s Michael Wilson and JPMorgan Chase & Co.’s Mislav Matejka said this week that equities stand to come under pressure beyond the first quarter as the economic and earnings outlook deteriorates.

 High-Risk Stocks’ Big Revival Faces Reckoning From Policy Hawks

The S&P 500 fell below its 200-day moving average on Thursday amid a banking rout as Silvergate Capital Corp. collapsed overnight and SVB Financial Group plummeted by a record amount following a stock sale to shore up losses. Equity futures signal more losses in store for Wall Street on Friday.

Among other notable flows from BofA’s report are:

  • US stock funds had a fifth week of outflows at $5.2 billion, while inflows into European funds resumed
  • By style, money entered US small cap funds and exited from growth, value and large cap
  • By sector, utilities led outflows, while energy and tech had inflows of $800 million and $700 million, respectively.

--With assistance from .

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