Stocks have struggled so far this year, with the S&P 500 losing 10%. Commentary from Bank of America strategists indicates more losses may be on the way.
Global equity funds saw on outflow of $17.5 billion in the week ended April 20, the worst week of the year, according to the strategists, citing EPFR data.
U.S. equity funds suffered an outflow of $19 billion, the biggest since December. The outflow was $19.6 billion for U.S. large-cap stocks.
“Everyone bearish, but redemptions just starting,” the strategists wrote in a bullet-point commentary.
75 Is The New 25
They also appear to anticipate big interest-rate increases from the Federal Reserve. It’s a “world of extreme inflation, rates shock just beginning (75 basis points is the new 25 basis points,” the strategists said.
The Fed raised rates by 25 basis points in March. Many investors expect the central bank to lift rates by 50 basis points at each of the next two meetings. Hawkish St. Louis Fed Gov. James Bullard said he wouldn’t rule out a 75-basis point hike, “but it is not my base case here.”
To be sure, the “set-up for [a] bear[-market] rally [is] not bad,” given bearish market sentiment; waning fear of the Ukraine war, as evidenced by the Russian ruble’s rebound; and peak inflation, the BofA strategists said.
Peak inflation means price increases may already have hit their highs.
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“But central banks [are] the oncoming freight train, and will tighten until credit and/or [the] consumer break[s],” they wrote.
Technical factors indicate that the S&P 500 will test 4,200 before it tests 4,800, the strategists said. The index recently stood at 4,300.
J.P. Morgan’s More Bullish View
But J.P. Morgan analysts see things a bit differently.
“Both sentiment and positioning are now too bearish,” they wrote in a commentary.
“While we slightly reduced our record equity allocation, we remain constructive on equities and think that a near-term rally is likely, particularly in small-cap and high-beta market segments.”
High beta stocks are ones that tend to move more than the overall market.
Too much in the way of interest-rate hikes has now been priced into stocks, and rates may level off, the strategists said.
That would happen as inflation itself levels off, “due to the transitory nature of the Covid impact, an underappreciated year-on-year base effect and softening demand as growth slows down,” they said.
By “base effect” the strategists mean that as the base of comparison for determining inflation rises to higher levels, that will put downward pressure on inflation numbers.