‘Unambiguous’ Buy Signal Overshadowed By Stagflation Reality

The stock market “basically dropped by one US economy in six months,” BofA’s Michael Hartnett said, marveling at the scope of the collapse in global equities from the highs in November.

Headed into Friday, global shares were on track for a seventh consecutive weekly decline (figure below), even as sentiment improved a bit headed into the weekend.

So far, developed market central banks’ push to douse the hottest inflation many young adults in advanced economies have ever experienced has done little to quell consumer prices. But it’s worked bearish miracles on stock prices, helping to wash away roughly $23 trillion in market value around the world.

“The larger story of the 2020s is regime change,” BofA’s Hartnett remarked. “Higher inflation, higher rates, higher volatility and lower asset valuations are driven by trends in society (inequality), politics (populism/progressivism), geopolitics (war), the environment (net-zero), the economy (de-globalization) and demographics (China population decline).”

Every asset class saw redemptions over the latest weekly reporting period. Bonds lost $12.3 billion, cash nearly $8 billion, stocks more than $5 billion and gold $1.4 billion.

Although we’re just starting to chip away at 2021’s equity inflow bonanza, fixed income outflows are adding up. “For every $100 of inflows to IG/HY/EM debt since April 2020, $27 has been redeemed,” Hartnett wrote. That number is just $4 for global equities since January of 2021. Hartnett’s choice of April 2020 from bonds isn’t coincidental. The Fed unveiled its intervention in US corporate credit markets in late March 2020.

The good news is, recent redemptions from DM equities and high yield debt, as well as worsening stock market breadth, finally pushed BofA’s Bull & Bear indicator below 2. At 1.5, it’s “in unambiguous contrarian buy territory,” Hartnett remarked (figure below).

Another BofA indicator, the “Global Breadth Rule,” is likewise at levels indicative of a contrarian “buy” signal, with >88% of equity indices trading below their 50- and 200-day moving averages.

The bad news is, “true capitulation” (as Hartnett puts it) seems a distant prospect.

Institutional and private client asset allocations aren’t indicative of panic. Consider, for example, that BofA private client equity allocations were 39% at the lows in 2009. They’re 63% currently (figure on the left, below).

The comparable figures for cash are 21% at the highs in February 2009 and around 12% now (figure on the right, above).

Of course, cash levels are rising. In fact, they’re the highest since 9/11 according to the May vintage of BofA’s Global Fund Manager survey, released earlier this week.

But “true capitulation = Fed capitulation,” Hartnett emphasized. For that, we need a “systemic event” and a rising US unemployment rate.

The table (above) shows that a net 78% in BofA’s Fund Manager survey still expect higher short-term rates. If you look at the readings seen in and around major crises, you’ll note that market participants overwhelmingly expected lower short-end rates — so, rate cuts.

That speaks to the quandary in the current environment. It speaks to why stagflation is so vexing. Central banks can’t ease. They need to tighten. Come hell or high recession.

The bottom line, Hartnett said, is that the “tape is very vulnerable to a bear rally,” but for now, anyway, BofA “would still argue” it’s best to keep a “sell-any-rips” mindset.

The title of Hartnett’s weekly: “3600 is the new bull case.”


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8 thoughts on “‘Unambiguous’ Buy Signal Overshadowed By Stagflation Reality

  1. It is great how quickly sentiment can shift in markets. The final shoe to drop will be when the Fed is done, whenever that is, and rate cut speculation begins. Then the yield curve steepens, the $ declines, early stage equities like financials rally, and you can rinse and repeat the cycle. But in the meantime we get to watch a very bumpy economy and financial market. And real people suffer in the interim. Part of the payback for all the stimulus will end up being slow growth down the road, but we are far from that right now. And don’t get me wrong- policymakers made a lot of good decisions to get us here (no really). The alternatives were a lot worse.

    1. “The one percent” is bleeding right now. Except for the adept members who may be bleeding a little less. Isn’t that reality OK? The bottom percenters are being bled by inflation. And the middle percenters? They are nervously watching their 401k balance.
      I am down 20%. But you know, none of this is real. Trumps tax cut… was slight of hand. More of the same. There hasn’t been “organic growth” in this country’s economy in my lifetime. “We the people” look for the trick/unseen/edge way forward. Because we seek differentiation. And we are too “mental”. We eschew the difficult path of “working” and have little fortitude to see any task through to fruition. When presented with the carrot of opportunity we refuse it even as the stick is extinction.
      Can you build me a Dyson’s sphere? No, I want to go to Mars.
      More of the same. Slash and burn mentality. Leave the box after you have filled it with litter.
      Is the universe ever expanding or will it eventually collapse ?
      I don’t know. What we do here now is the important part.
      This site (we are on) is dedicated to the here and now (?). Partly, what is the economic here and now with it’s affect on “making money”. We are not really making money. Just as we are not really losing money.
      I am actually in a good mood. Not in the sense, I told you so. Although I guess honestly that too. Maybe even mostly. But also in the sense, “the Emperor has no clothes!”.
      There has been a lot of blame cast around since Trump’s Presidency.
      Let’s have some fun now.
      Let’s have some stagflation.
      Let’s see how we cope with that.
      When we get to the other side, answer to posterity, won’t you?
      Oh woe is me. No, not at all.
      It is important that the Fed continue to hike in measured, preferably .25 increments. Thereby showing a (political) commitment to taming inflation (that they can not really control). So that “the investor” is not unduly lured away from stocks in the direction of meaningful bond yields. It is important that “the market” NOT “understand” the Fed thereby being able to “call it’s hand”. There are no Unions. Volker was fighting an entrenched mindset inflation. Will Social Media be as potent a force as Unions? Hard to believe. So this inflation runs a different course.

      The mid terms are coming. We don’t have time for any of this.

      If this post is allowed, Thank you for indulging me. I have learned so much here. A place to go in retirement.
      Also, Why is this a reply to RIA’s post?
      Stream of consciousness.

  2. “Every asset class saw redemptions over the latest weekly reporting period. Bonds lost $12.3 billion, cash nearly $8 billion, stocks more than $5 billion and gold $1.4 billion.” Interesting – $8BN redemptions of cash? Where did that go . . .

    1. Well, “cash” is an asset (i.e., fund) class in this sense. Redemptions from “cash” doesn’t mean people took physical money out of the bank and “redeemed” it by fire in their backyard.

      1. I understand that (“cash” = money market funds), but it is interesting to see fund flows out of equity and fixed income but not inflow to “cash”. I wonder if we are seeing margin calls and repayment of securing lending.

    2. I, too, wondered where that $8 billion went. Taking a look at the St. Louis Fed’s economics database might give a hint. M2 could easily have declined by $8 billion out of a total $22 trillion without being newsworthy. Consider the $8B in contrast to the week of January 17-24 when M2 contracted by $183 B. It then expanded by $529 B to the latest reported date April 4. FRED posts M2 reports monthly. The next report will post on Tuesday.

      That leaves me with jyl’s question unanswered. Maybe the Fed sucked it out of the monetary base, but I couldn’t consider that possibility without current M2 data. So, where did BofA get its $8 B number? And, is it significant as anything more than a barely visible wobble in a trendline?

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