Bank of America strategists said the rising probability of a recession amid numerous risks has sent investors fleeing U.S. stocks.
Since mid-August, U.S. stocks have been falling all the way, with Fed Chairman Powell adding fuel to the fire at the Jackson Hole annual meeting, causing the decline to intensify and dashing hopes of a restart of the bull market.
According to EPFR Global data cited by the bank, U.S. equity funds outflowed $10.9 billion in the week ended Sept. 7; the largest outflow in 11 weeks was led by technology stocks, with outflows of $1.8 billion . The data showed that global equity funds outflowed $14.5 billion, while $6.1 billion flowed into government bonds such as U.S. Treasuries.
Bank of America strategists led by Michael Hartnett pointed to soaring inflation, the Russian-Ukrainian conflict and the rising cost of capital as the main reasons for investors to flee the stock market. Those factors, they said, contributed to market volatility and credit default events, such as the interest rate investors paid to hedge their positions in two-year German government bonds, surging to the highest level since June 2008.
Federal Reserve officials this week reiterated their hawkish rhetoric, but did little to ease investor fears that tightening monetary policy would tip the economy into recession. Still, stocks rallied for two days in a row, putting the S&P 500 on track for its first weekly gain in four.
Powell stressed on Thursday that the Fed’s efforts to fight inflation will “not stop until it hits its target.” To prevent inflation from becoming as entrenched as it did in the 1970s, the Fed is going all out to lower inflation, he said.
On the same day, U.S. Treasury Secretary Janet Yellen said that lower gasoline prices may put further downward pressure on the U.S. overall CPI in August, but there are still many uncertainties in the long-term inflation outlook due to the conflict between Russia and Ukraine and the ensuing energy crisis.
Bank of America strategists said that although the U.S. stock market is still strong relative to the bond market, there has been no consecutive monthly net inflows into the stock market in the past six months.
Deutsche Bank strategists pointed out this week that if the economy falls into a recession, U.S. stocks could fall by a further 25%, and the risk of a sustained rally in stocks is increasing. Meanwhile, Morgan Stanley’s Michael J. Wilson said the earnings outlook for U.S. companies has become more pessimistic amid slowing economic growth.
Bank of America strategists said fiscal support measures in European countries delayed the recession and boosted stocks, but also worsened the outlook for inflation and debt.