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Investors sold U.S. stocks at a pace not seen in over nine months in the past week.
Global equity funds recorded a weekly outflow of $16.9 billion in the week to Wednesday, the fastest weekly pace since December, as fears that interest rates will stay higher for longer darken the outlook for the economy and risk assets, said strategists at Bank of America Global Research.
In their weekly “Flow Show” note, a team of BofA strategists led by Michael Hartnett, said expectations that major central banks around the world will keep interest rates elevated will result in the risks of a hard landing for the economy in the first half of 2024.
“We believe ‘lower-for-longer’ rates and yields caused bubble and boom in 2010s and 2020/21, [but] ‘higher-for-longer’ means hard landing risks and [bubble] pops and busts in the first half of 2024,” Hartnett and his team said in a Friday note.
The strategists at BofA analyzed fund flows in the run-up to this week’s Federal Reserve policy meeting when policymakers on Wednesday kept the benchmark interest rates unchanged in the range of 5.25%-5.5%, but they sent a clear message that the borrowing costs were expected to be “higher for longer” by lowering their forecast for rate cuts in 2024.
See: This former Fed insider has 3 big takeaways from Powell’s press conference
On Thursday, the Bank of England also left its key interest rate unchanged for the first time since November 2021 amid signs that inflation is cooling and the U.K.’s economy is teetering on the brink of contraction.
Hartnett and his team said investors also bought $2.5 billion of Treasuries in the week through Sept. 20, which recorded a 32nd consecutive week of inflows.
Treasury yields continued to climb this week with the 2-year rate
BX:TMUBMUSD02Y
Thursday carving out its highest level since July 18, 2006, while the yield of the 10-year rate
BX:TMUBMUSD10Y
rising to its highest since Oct. 18, 2007, according to Dow Jones Market Data.
The strategists at BofA also noted some of the leaders in the stock-market rally earlier this summer, such as the so-called Magnificent Seven technology stocks, semiconductor-related stocks and homebuilder stocks, all had rallied back close to their highs in 2021 on “rates have peaked” optimism, so it is important to see how they react to the drop of bond yields, Hartnett and his team said.
“If lower yields spark another rally in U.S. homebuilders and chipmakers, it’s ‘Bull5000’ [for the S&P 500],” said Hartnett and his team. “But if they can’t generate gains, it’s ‘sell the last rate hike’ and back to ‘Bear4000,’” the strategists said.
See: Bank of America strategist becomes latest on Wall Street to raise S&P 500 target
U.S. stocks ended the volatile trading week with steep losses. Both the S&P 500
SPX
and Nasdaq Composite
COMP
capped off their worst week since March, down 2.9% and 3.6%, respectively, while the Dow Jones Industrial Average
DJIA
was off 1.9% for the week, according to Dow Jones Market Data.
