Trader Aaron Ford, left, works on the floor of the New York Stock Exchange, Sept. 28, 2021. (AP/Richard Drew)
Investors are fleeing to cash in the biggest rush since the onset of the covid pandemic amid growing concerns of an economic downturn, according to Bank of America analyst Josh Hartnett.
In a flight to cash or flight to liquidity, investors have mainly a bearish outlook, preferring to sell assets and hold more cash in expectation of lower asset prices in the near future. Developers and business leaders often put off new investment projects until after the storm passes.
The BofA team predicts that equity and credit markets will decline in the coming months and says investors should sell stocks rather than buy them after the last rate hike.
Money-market funds are the new bubble asset, according to Hartnett and his BofA team, Steve Goldstein reported for Market Watch.
Cash has seen the biggest weekly inflows since March 2020, the biggest six-week inflow to Treasurys ever, and the largest weekly outflow from investment-grade bonds since Oct. 2022, BofA reported. Assets under management for money market funds are up more than $300 billion in the past four weeks to $5.1 trillion — the highest on record.
Surges in emergency Fed discount window borrowing have historically happened around big stock-market lows, Hartnett observed. The last two times money-market fund assets surged — in 2008 and in 2020 — the Federal Reserve cut interest rates.
There are differences this time, Hartnett wrote. There is inflation and labor markets in the U.S. and other industrialized nations, remain very strong. The Bank of America team counted 46 interest rate hikes this year, including by the Swiss National Bank after its rescue of Credit Suisse.
History, the BofA team wrote, says to sell the last interest rate hike. When banks borrow from the Fed in an emergency, they tighten lending standards, which results in less lending, which leads to less small-business optimism, which eventually cracks the labor market, Market Watch reported.
The three major stock indexes fell on March 22 as Federal Reserve Chairman Jerome Powell announced a new interest rate hike of 0.25 percent — the ninth rate hike in a year and the first after two weeks of banking turmoil — bringing the benchmark funds rate to a range of 4.75-to-5 percent.
Hartnett, whose bearish predictions played out accurately in 2022, predicts that investment-grade stocks and spreads will take a hit in the next three to six months. “Credit and stock markets too greedy for rate cuts, not fearful enough of recession,” his team said in a note Thursday.
Markets have been jittery amid the collapse of regional banks Silicon Valley Bank (SVB) and New York’s Signature Bank, but stress in the banking system hasn’t stopped the Federal Reserve from continuing to hike interest rates to try and fight inflation.
Hartnett wrote that the Fed is likely to cut interest rates very aggressively over the next 12 months, but that may only start once payrolls start turning negative.
Investors should sell equities after the last rate hike over the negative impact of higher unemployment, Hartnett said. “It’s now a longer-than-normal bear market” but policy intervention meant stocks have not priced in a large slump and biggest bull market recoveries “occur only after the biggest declines,” he wrote.
