Fed Rate-Hike Pause No Reason To Buy Stocks, BofA Says

(Bloomberg) -- The Federal Reserve may be signaling its willingness to pause rate hikes, but Bank of America Corp.'s Michael Hartnett says it's not yet time to buy equities as outflows accelerate amid elevated inflation and recession fears. 

Redemptions from global stock funds reached $6.6 billion in the week through May 3 — the most in more than two months, according to a note from the bank citing EPFR Global data. Inflows into cash funds surged to nearly $60 billion, while $11 billion entered bonds, the data show.

Hartnett — who correctly predicted the equity exodus last year — said that a “new structural bull market requires big Fed easing,” which in turn needs a “big recession.” With sticky price pressures and a resilient labor market preventing the Fed from pivoting to rate cuts, “sell the last rate hike,” the strategist wrote in the note dated May 4.

After posting a second straight monthly gain in April, US stocks have pulled back in the early days of May amid prospects of higher-for-longer interest rates and slowing economic growth. The Fed hiked interest rates by 25 basis points this week and hinted it could be the last one for now. Market strategists have also warned about further declines in corporate earnings even as the first-quarter season has come in better than feared. 

BofA's Hartnett said the “big story of 2023” remains an “imminent recession,” which will damage the “Goldilocks” resilience of credit, technology stocks and homebuilders, while creating opportunities in so-called hard-landing assets such as oil, small caps and banks.

Investors will get the next clue on the health of the US labor market later Friday from the jobs data for April, after figures yesterday showed applications for unemployment benefits rose by the most in six weeks while continuing claims fell.  

Other key highlights from the note:

• US equity funds had a third straight week of outflows at $8.8 billion, while redemptions from European funds continued for an eighth straight week
• All investment styles showed outflows: US growth, small cap, value and large cap
• By sector: tech and consumer had the biggest inflows, while energy and financials saw the most outflows
• Money-market funds had $588 billion inflows in the past 10 weeks; they surged by $500 billion after the Lehman Brothers crash and $1.2 trillion after Covid

--With assistance from Michael Msika.

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