Bank of America strategists led by Michael Hartnett said investors were pulling out of U.S. stocks as the possibility of an economic downturn rose. Equity funds in the U.S. saw outflows of $10.9 billion in the week ended Sept. 7, the biggest outflow in 11 weeks, according to EPFR Global data cited by the bank. Technology stocks had the largest outflow, at $1.8 billion. The data also showed that global equity funds outflowed $14.5 billion, while $6.1 billion flowed into government bonds and Treasuries.
Strategists pointed to rising inflation, the war in Ukraine and the rising cost of capital as factors driving investors away from stocks. That increased volatility, they said, and led to some credit events, such as interest rates paid by investors to hedge their positions in two-year German bunds soaring to the highest level since June 2008.
Fed officials this week reiterated their hawkish stance, doing little to reassure investors worried that monetary tightening would tip the economy into recession. Still, a two-day rally in stocks put the S&P 500 on track for its first weekly gain in four as investors viewed current valuations as low.
While stocks have held up relative to bonds, there have been no monthly net inflows to stocks over the past six months, according to Bank of America strategists. “Bonds hate inflation, stocks hate recession, and risk appetite is very low,” they noted.
Deutsche Bank strategists said this week that if the economy falls into recession, U.S. stocks could continue to fall by 25%. Meanwhile, one of Wall Street’s biggest bears, Morgan Stanley strategist Michael J. Wilson, has become more pessimistic about the earnings outlook for U.S. stocks amid slowing U.S. economic growth.
Bank of America strategists also said fiscal support from the European Union and the U.K. slowed the recession, boosting stocks but worsening the outlook for inflation, debt and yields.
Still, they believe it is good news that the market is signaling a peak in cyclical yields over the next three to six months. Meanwhile, the Bank of America’s Bull/Bear indicator fell into its maximum bearish territory at 0, which is often seen as a contrarian buy signal.
In Europe, funds flowed out for the 30th week in a row.
By style, U.S. small-cap, value, growth, and large-cap stocks all saw redemptions.