Too early for Fed pivot as investors flock to stocks, says BofA

Investors are pouring large sums into equities but the rally has limited room to run as the Federal Reserve remains steadfast on hiking interest rates, according to Bank of America Corp (BofA) strategists.

Global equity funds saw about $23 billion of inflows in the week through October 26, the largest amount since March, according to a note from the bank citing EPFR Global data. In the US, equity funds had $21.4 billion of inflows. Cash funds saw additions of $28.4 billion, while gold saw a $500 million redemption.

Still, it’s too early for a Fed policy pivot “absent sudden collapse in inflation & payrolls,” strategists led by Michael Hartnett wrote in the note. The central bank normally starts cutting only once the unemployment rate exceeds 5.5% versus the current rate of 3.5%, they said.

The S&P 500 is set for a second week of gains as traders parse earnings releases and economic data, with a report showing the US economy rebounded following two quarterly contractions in part due to resilient consumers and businesses. The rally is only a “bear hug,” according to the strategists, who see the S&P 500 extending gains to as much as 4,000 points — about 5% from the last close — before pulling back again and hitting a low in the first quarter of next year.

The bond market is “now pivoting from inflation to recession,” the strategists said. “Recession trade is always long bonds, short stocks.”

Global bonds are rebounding as dovish signals from central bankers revive investor hopes that this year’s frantic pace of policy tightening has reached a plateau. Still, the debt market has been caught out before on expectations for an easier Fed, with rallies earlier in the year quickly fading.

Bank of America’s custom bull-and-bear indicator remains at the “maximum bearish” level, often regarded as a contrarian buy signal.

By trading style, investors poured cash into US large and small caps, value, and growth. Among sectors, tech had the largest inflows at $2.3 billion, the strategists wrote.

—Bloomberg