Shares have yet to hit lows, says BofA

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

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

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

He found that the average of those previous bear market rallies was 17.2% over 39 trading days. The S&P 500 over 41 trading days gained 17.4% through the close of trading on Thursday. The index on Friday moved around 4,226.

“Until now [a] classic bearish rally and ultimately self-defeating rally… do you think SPX >4500 and the Fed are going to stop rising?” BofA said, referring to the Fed’s rate hike campaign to cool the environment hottest inflation rate in four decades.

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

The “pivot” trade and the meme stock revival underscored the market’s waning fear of Fed policy. But investors this week heard Fed officials express support for a third consecutive 75 basis point rate hike at the Fed’s September meeting. Fed Chairman Jerome Powell will speak next Friday at the central bank’s symposium in Jackson Hole, Wyoming.

Bank of America said it takes the “cyclical bearish” view that stocks have moved near the top of their trading range and that the market has yet to see the “final lows” that may come next year.

Among his reasoning, he pointed out that for every $100 of bonds the Fed bought during the COVID-19 crisis, for a total of $5 trillion, it sold only $2. [“With] inflation is on track to be 5-6% next spring, quantitative tightening is likely to intensify significantly in the coming months, which would be negative for credit spreads and equity multiples,” he said. Bank of America Securities Chief Investment Strategist Michael Hartnett in the Note.

In the meantime, housing trends are already “threatening,” and that means as the Fed tightens policy further, credit, consumer and labor markets are likely to come under deeper pressure and that’s negative for corporate profits by action.

“In short, we prefer to be … long a 4.5% unemployment rate, not a 3.5% unemployment rate.”

the blowout july jobs report showed that the unemployment rate fell to 3.5%. A rise in the unemployment rate would dampen activity among retail investors, BofA said.

The S&P 500’s summer rally posted a July advance of 9.1%, the biggest monthly gain since November 2020. The rally has been narrow, with BofA determining that just four stocks: Apple, Microsoft, AmazonY Tesla – contributed 30% of the S&P 500’s gain during its last rally. Large-cap tech stocks have been hit particularly hard during 2022 as investors positioned themselves for an aggressive cycle of rate hikes by the Federal Reserve to combat smoldering 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 prospects of the consumer price index falling by below 4%. In addition, if there is no economic recession in the United States, that is bullish for corporate profits in the current “age of government bailouts,” the bank said.

In 2022, “politicians [are] panic and subsidize consumer spending on energy, oil, gasoline everywhere from San Francisco to London to Berlin, regardless of long-term climate consequences.”

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