That’s how one popular strategist is feeling right now, as traders turn the page on a remarkable first quarter (and not just for markets).
Rates, regulation and redistribution will be key themes in the second half, BofA’s Michael Hartnett said, in the latest edition of his popular weekly “Flow Show” series. That’s a familiar refrain from Hartnett.
The “three Rs,” as it were, “mean we are cautious on asset returns in 2021,” he wrote, adding that “SPX 3,400 [is] more likely than 4,400 in the next six months.”
That sounds like an innocent enough suggestion. A ~13% decline might fairly (indeed, accurately) be called “pedestrian” in the context of the historic rally from the March 2020 pandemic lows.
And yet, like Ron Burgundy, a decline from Friday’s levels to 3,400 would seem like “kind of a big deal,” especially given renewed faith in the notion that markets can only go higher (a hallmark of melt-ups).
So, what would it take to get stocks sustainably to new highs in the second quarter? Well, for Hartnett, it “would require lower-than-expected inflation given booming growth [is] now super-consensus.” “Oil never lies,” he remarked.
Next, he ran through some numbers which, while familiar, don’t seem to be losing their capacity to elicit at small eyebrow raise: “Oil +51% past nine months, copper +87% YoY, food prices +27% past nine months, lumber +212% YoY, US house prices +19% YoY, digital art in $69 million NFT sale and shipping freight rates +297% Y/Y.”
There’s some inflation. Let’s hope it’s “transitory.”
I jest at Fed officials’ expense. And yet, you’d be disingenuous to deny that at least some of the price pressures manifesting in, for example, record highs on PMI input price gauges and lumber going parabolic, aren’t the result of temporary distortions created by pandemic dynamics from supply chain shocks to froth in the US housing market.
What should probably concern folks, though, is the rise in global food prices. It feels like I highlight the chart (below) at least three times per week, but Hartnett used it in his latest, so here it is again.
That’s a recipe (no pun intended) for problems in developing and frontier economies, and it could be a figurative and literal death sentence in extremely poor countries. The read-through is potential societal unrest. Not in the developed world, but elsewhere.
In any event, I’ve been over that on too many occasions to count so I won’t pound the (dinner) table on it further — or at least not until in manifests in an uprising in some country Americans couldn’t identify on an unmarked map if their lives depended on it.
On the flows side of things, it’s notable that the latest weekly reporting period showed $45.6 billion into cash. That was the largest inflow since April of last year, when the scent of panic was still thick in the pathogen-laden air. ICI’s data showed a $62 billion inflow in the week to March 24 (figure below).
Global equities took in just $4.1 billion last week, on EPFR’s data. That was the weakest inflow since December.
US equity funds saw outflows of $9.7 billion, the largest exodus in 13 weeks.
Maybe they’re “rebalancing.”