Bank of America strategists believe investors should sell stocks on the first Federal Reserve rate cut, citing an increased likelihood of a more severe U.S. recession.
In their weekly report published Friday, strategists highlighted the "clearly rising" risks of a "hard landing" at a time when the consensus expects a soft or no landing.
Analysts specifically point out the historical correlation between the ISM Manufacturing gauge and nonfarm payrolls. They note that the only extended period when the gauge remained in the contraction zone while payrolls stayed positive was between 1984 and 1986.
As of Thursday, U.S. manufacturing activity contracted by the most in eight months, emphasizing these risks.
Meanwhile, risk assets have preemptively surged ahead of anticipated Fed rate cuts, with the S&P 500 rising 32% over the past nine months. This contrasts sharply with the average 2% gain in the 12 run-ups to the first Fed rate cut since 1970, according to BofA.
EPFR Global data for the week through July 31 revealed significant flows into bond and stock funds, with bond funds receiving $14.6 billion and stock funds $8.9 billion.
Gold saw an inflow of $0.8 billion, while cash funds experienced outflows of $12.5 billion, and crypto funds lost $0.4 billion.
Technology stocks attracted the largest inflows in six weeks at $3.6 billion.
At the same time, emerging markets equity funds received $4.5 billion, with $4.8 billion allocated to Chinese stocks. Investment-grade bonds saw $10.8 billion in inflows, and high-yield bonds recorded $1.5 billion.
It’s important to note that this data doesn’t take into account Thursday’s moves, when the S&P 500 and Nasdaq 100 fell 1.3% and 2.4%, respectively, amid growing concerns over the health of the US economy.