The Things People Worry About

You’ve heard it before. And you’ll surely hear it again.

“Higher inflation, hawkish central banks [and] weaker growth” may be fixtures in the back half of 2021, and they’ll be accompanied by the “combo of rising rates, regulation, and redistribution” as well as “peak positioning, policy and profits.” That’s according to BofA’s Michael Hartnett, who spent the last several months singing some version of that tune.

The read-through, he said in his latest, is low or negative returns for stocks and credit in the second half. The “optimal barbell is long inflation assets and defensive/quality,” he added.

Global equity funds took in another $7 billion in the latest weekly reporting period, bringing the YTD total to $575 billion (figure below).

Hartnett described fiscal and monetary largesse as a “policy bubble.” The new spending included in the bipartisan infrastructure plan unveiled in the US Thursday “takes the running tally of global monetary and fiscal stimulus to $30.5 trillion in the past 15 months,” he remarked, marveling that the figure is “equivalent to the entire Chinese and European GDPs.”

Over that same period (15 months), Hartnett calculated that central banks have purchased $0.9 billion in financial assets “every hour.”

The global equity market cap has ballooned by $54 trillion since the pandemic.

Still, BofA’s Bull & Bear Indicator is well shy of extreme territory. It receded to 6.4 this week from 6.6. (8 Is the threshold for concern.)

Along the same lines (i.e., speaking of things that suggest the summer lull may be keeping a lid on euphoria or, at the least, undermining momentum), market breadth is exceptionally narrow with fewer than 50% of S&P 500 members trading beyond their 50-day moving average (figure below).

That’s “the lowest percentage since 1999 when the benchmark reached records,” Bloomberg’s Ye Xie wrote Thursday, adding that “since 1990, there have been only two previous periods when this negative divergence (record high stocks accompanied by breadth below 50) happened — December 1999 and June 1998 [presaging] the burst of the dot-com bubble and the LTCM collapse, respectively.”

Hartnett mused Thursday that “only a market crash will prevent global central banks from tightening over the next six months.”

Meanwhile, Nomura’s Charlie McElligott said the YTD “pervasive demand for tail hedges continues to hold very strong.” That, he wrote, “is not just a function of equities at all-time highs or credit parked at tights.” Rather, clients are still concerned about the prospect of an “inflation overshoot” catalyzing a “heavy-handed Fed tightening cycle.”