Shares haven’t bottomed yet, says BofA

  • BofA says S&P 500’s summer surge of 17.4% in 41 trading days is a ‘classic’ bear market rally
  • The Fed still has to work to curb inflation and that could spell another pullback for equities.
  • The bank found that just four large-cap stocks contributed 30% of the index’s recent gains.

The summer’s gains in the S&P 500 should be viewed as an average bear market rally, according to Bank of America, and the index remains vulnerable to falling below its recent lows.

The investment bank, in its weekly Flow Show note published Friday, looked at 43 bear market rallies, marked by gains of more than 10%, since 1929.

It found that the average of those past bear market rallies was 17.2% in 39 trading days. The S&P 500 in 41 trading days was up 17.4% through the end of Thursday’s session. The index moved around 4,226 on Friday.

“As far [a] classic bear rally, and ultimately self-defeating rally… do you think SPX >4500 and Fed will stop walking?” said BofA, referring to the Federal Reserve’s rate-raising campaign to cool the hottest inflationary environment in four decades.

The S&P 500’s jump from its June 16 low found fuel from investors who interpreted the comments by Federal Reserve Chairman Jerome Powell as a “pivot” toward policymakers considering cutting rates in the light of a slowing economy and possibly lower inflation. Headline inflation eased to 8.5% in July from 9.1% in June, which marked its 41-year high.

Pivot trading and the resurgence of meme stocks underscored the market’s waning fears of Fed policy. But investors heard support from Fed officials this week for a third consecutive 75 basis point rate hike at the Fed’s September meeting. Fed Chair Jerome Powell will speak at the central bank symposium in Jackson Hole, Wyoming next Friday.

Bank of America said it has a “cyclical bear” view that stocks have moved near the top of their trading range and that the market has yet to see “ultimate lows” that could come next year.

One of his rationales was that for every $100 in bonds the Fed bought during the COVID crisis — $5 trillion in total — it sold only $2. [“With] With inflation on track to be 5%-6% next spring, quantitative tightening is likely to ramp up significantly in the coming months, which would be negative for credit spreads and equity multiples,” said Michael Hartnett, chief investment strategist at Bank of America Securities. Remark.

Meanwhile, housing trends are “already looming,” meaning that as the Fed tightens policy further, credit, consumer and labor markets are likely to come under greater pressure, negatively affecting corporate earnings per share.

“Basically, we prefer to be… long stocks with a 4.5% unemployment rate, not a 3.5% unemployment rate.”

The July jobs report showed that the unemployment rate fell to 3.5%. A rise in the unemployment rate would bring activity among private investors to a halt, BofA said.

The S&P 500’s summer surge was marked by a 9.1% rise in July, the largest monthly gain since November 2020. The rally was narrow, with BofA finding that only four stocks — Apple, Microsoft, Amazon and Tesla — were down 30%. contributed to the S&P 500’s gains during the latest rally. Large-cap tech stocks, in particular, took a hard hit in 2022 as investors positioned themselves for an aggressive Fed rate hike cycle to combat scorching inflation.

BofA said it is now “pragmatically bearish” for 2022 rather than dogmatically bearish, in part because if services inflation quickly follows goods inflation, that would be bullish for the outlook for the consumer price index falling below 4%. Even if there is no economic recession in the US, it will benefit corporate profits in the current “era of government bailouts,” the bank said.

In 2022, “Politicians [are] panic and subsidize consumer spending on energy, oil and gasoline everywhere from San Francisco to London to Berlin, whatever the long-term climate impact.”

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