Quiver Quantitative - Bank of America (NYSE:BAC) strategists have identified that investors are offloading equities at the quickest rate since December, triggered by concerns that sustained higher interest rates might pave the way for a recession. In the week leading to Sept. 20, global equity funds experienced outflows amounting to $16.9 billion, with US stock funds at the forefront of this movement. Michael Hartnett, leading the bank's team, warns that the continuation of high interest rates might lead to a challenging economic downturn by 2024, further instigating market disruptions.
Signs of the impending economic challenges have begun emerging, as pointed out by Hartnett in his note dated Sept. 21. Indicators such as an inclining yield curve, growth in unemployment and personal savings rates, and a surge in defaults and delinquencies serve as a precursor. Despite the S&P 500 showing an increase of approximately 13% this year, reaching 4,330, its momentum has slowed since late July. This deceleration has been attributed to the Federal Reserve's indication of potentially maintaining higher interest rates for an extended period.
The current market situation sees the S&P 500 and Nasdaq 100 both on track for their most significant monthly dip since the previous December. This precarious state has not gone unnoticed, with other market strategists like JPMorgan (NYSE:JPM) Marko Kolanovic cautioning against the threats the US equity market faces due to the rise in real rates and the constrained capital cost. Morgan Stanley 's (NYSE:MS) Michael Wilson has also voiced that clients are anticipating a more challenging outlook for stocks come 2024.
Furthermore, Hartnett from BofA commented that the market's reaction to the performance of this year's leading stocks when bond yields decrease would be crucial in determining future trends. If reduced yields initiate another surge in US homebuilders and chipmakers, it indicates a bullish trend. However, if they fail to produce positive results, it's a signal to "sell the last rate hike and revert to 'Bear4000,'" he mentions. The note also highlighted that while global bond funds observed their 26th consecutive week of inflows totaling $2.5 billion, cash funds saw a departure of $4.3 billion.
This article was originally published on Quiver Quantitative