BofA sees 'correction' ahead in stockmarkets

Strategists at Bank of America are anticipating a 'correction' in global stockmarkets over the next few months but within the context of more enduring changes in the backdrop for financial markets.

Somewhat ironically, the urge to 'sell the vaccine [news]' was being tempered by the slow rollout of inoculations, strategists led by Michael Hartnett argued in a research report sent to clients.

Regarding the recent selling among heavily-shorted stocks, they termed it a small LTCM event, in reference to the demise of the much ballyhooed hedge fund Long Term Capital Management in 1998, which at the time rocked markets for a few months.

This time around however leverage and systemic contagion were not present, although fresh forced selling of high-quality technology names, which had benefited most from central banks' quantitative easing would constitute a "more sinister development", they warned.

Hartnett also pointed out other risks to watch for, including credit markets, telling clients "if you break credit, you break the bull".

He also said Chinese markets were acting as a lead indicator and that once tighter policy in the People's Republic of China started to induce selling in shares of Chinese leaders, then "China liquidity tightening fears will become contagious".

Hartnett also noted the visible signs of excess on Wall Street in the form of a near quadrupling in gross proceeds from Special Purpose Acquisition Companies to reach $305bn.

For 2021 as whole, his strategy team was anticipating a smaller than 1% rise for the S&P 500, with US gross domestic product seen expanding by 5%, company profits shooting 20% higher and inflation running at 3% alongside.

Looking out to the longer term, it was higher market interest rates, tighter regulation and redistributive income policies which would put an end to the 'bull market', he said.

Around the world, the direction of travel was increasingly clear, with the global economy heading into a similar set-up as seen in the early 1920s, one of bigger government, a smaller world, US dollar debasement, and fiscal excess.

It would be a "mirror image", so to speak, of the deflationary 1980s, characterised by balanced budgets, globalisation, deregulation, and privatisations.

Although the result of a supernova of central bank liquidity, the current market value of the seven largest US technology firms now stood at about $9trn, versus the $9.6trn in wages for the whole US economy.

In 2006, the former was 15 times smaller than the latter.