Investors should offload risky assets after recent gains as technical and macroeconomic headwinds are building, according to Bank of America Corp.’s Michael Hartnett.
The S&P 500’s recent low, reached on Oct. 27, has been followed by an “epic risk rally,” the strategist wrote in a note. Referring to a broad advance marked by narrowing high-yield spreads, jumps in small-caps, shares of US regional banks, distressed tech and China-exposed assets, Hartnett said investors should “fade it.”
BofA’s own Bull and Bear Indicator has flashed a contrarian buy signal for the past five weeks. Stocks have historically risen by a median of 1% to 3% from the start of this buy signal, which would represent a target of 4,500 for the S&P 500 this time round. Harnett, who has been bearish all year despite a rally in stocks, suggests “fading above these levels.” The US benchmark closed at 4,508 on Thursday.
Riskier assets have rallied this month amid growing expectations the Federal Reserve is done with its rate-hiking campaign, with cooler-than-expected inflation figures increasing optimism about a dovish policy pivot. Global stock funds attracted $23.5 billion in the week through Nov. 15, the second-biggest inflows of the year, according to the BofA note citing data from EPFR Global.
Easier financial conditions, as bond yields dropped to 4% from 5%, have triggered bullish risk and spurred buying in the asset classes Hartnett mentioned. On the other hand, a further drop in yields to 3% would be perceived as recessionary, prompting bearish risk, he said. A less positive outlook may already be evident in oil prices. “Oil now in bear market (-22% from Sept high) on recessionary demand or ‘peak geopolitical risk,’” he wrote.
