'Sell the last rate hike' strategy is in action, stocks could fall further - BofA

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'Sell the last rate hike' strategy is in action, stocks could fall further - BofA
Credit: © Reuters.

Global equities experienced their most significant outflows since December 2022, with a total of $16.9 billion leaving the market, according to Bank of America.

This trend was led by U.S. stocks and is linked to rising concerns of a potential economic hard landing, according to the bank’s strategists. In contrast, bonds saw inflows of $2.5 billion, while $4.3 billion exited money markets, and gold lost $300 million.

BofA continues to advocate for a "sell the last hike" approach and point to various indicators, such as yield curve steepening, rising unemployment rates , increased personal savings, higher high-yield defaults, and more credit card and auto loan delinquencies, as potential signs of a hard landing.

“Sell the last rate hike"...strategy tends to work when monetary policy needs to work harder to slow economy in inflationary era (e.g. 1970s/1980s); 5-year Treasury at 5% we think buy, meantime stagflationary barbell in stocks (long energy, long staples), or contrarian trades via long “hard landing” plays e.g. REITs, retail ( XRT ), banks (BKX) vs “no landing” plays Mag7, SOX , XHB , XLI , XBD ; and own gold as hedge against nightmare of higher yields and lower US dollar on loss of credibility of US policy makers,” the strategists explained.

Despite these concerns, investors have allocated $1.0 trillion to cash year-to-date, with significant investments in Treasuries, investment-grade bonds, equities, and the technology sector, suggesting a cautious approach and willingness to wait for market developments.

Bank of America’s analysis shows a strong correlation between U.S. job openings (labor demand) and stock market, which suggests that U.S. stocks are to move lower in the near term.

U.S. equities lost $17.9 billion in a week to Wednesday. In contrast, emerging markets (EM) saw inflows of $1.4 billion, indicating some investor interest in these markets.

Japan had its second consecutive week of outflows at $300 million, suggesting caution in the Japanese equity market. Europe continued to experience outflows for the 28th consecutive week, with $3.1 billion leaving the region's equities.


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