BofA strategists sound bearish note on stocks, say Fed 'nowhere near done'
BofA Securities strategists sounded a 'bearish' note on the outlook for equity markets arguing that the US central bank was not done and enumerating a list of reasons to back up their thinking.
For starters, the latest rally had been the classic bear market rally, Michael Hartnett and Myung-Jee Jung said in a research note sent to clients.
Over 43 past bear market rallies since 1929, defined as an up move of greater than 10%, the average gain for the S&P 500 had been 17.2% and their average duration of 39 trading days.
The current rally had thus far seen the S&P 500 rise 17.4% over a span of 41 days, the said, textbook in other words.
As well, positioning showed that while everyone was bearish, no one had actually sold stocks.
They key in their opinion however appeared to lay in that the Federal Reserve had sold roughly $2 for every $100 of bonds that it purchased throughout the pandemic.
So, they surmised, with inflation headed towards 5.0-6.0% by next spring, quantitative easing would likely be stepped up, a negative for credit spreads and equity multiples.
"[The] last time Fed ended hiking cycle with negative real rates was 1954 & even assuming CPI gains halve next 6 months inflation 5-6% next spring; whether Fed knows or not, they're nowhere near done," they commented.
Lastly, with housing trends already "menacing" and with the Fed set to tighten credit further, consumer and labour markets would come under pressure.
On the latter, they pointed out that when joblessness rose there was "no retail investor".
Tighter credit was also a negative for earnings per share.
"In short we prefer to be v long stocks at a 4.5% unemployment rate, not a 3.5% unemployment rate."