BofA Says ‘Appalling’ Mood Fuels $11 Billion US Stocks Exodus

(Bloomberg) — Investors are rushing out of US equities as the likelihood of an economic downturn increases amid a myriad of risks, according to Bank of America Corp. strategists.

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The nation’s stock funds had outflows of $10.9 billion in the week to Sept. 7, according to EPFR Global data cited by the bank. The biggest exodus in 11 weeks was led by technology stocks, which saw withdrawals of $1.8 billion. Global equity funds had outflows of $14.5 billion, while $6.1 billion was poured into government and Treasury bonds, the data show.

Strategists led by Michael Hartnett pointed to rising inflation, the war in Ukraine and the increasing cost of money as being among factors driving investors away from stocks. That’s fueling volatility and credit events such as the rate investors pay to hedge positions in two-year German paper soaring to the most in data going back to June 2008, they said.

Federal Reserve officials reiterated their hawkish commentary this week, doing little to soothe investors worried that monetary tightening will send the economy into a recession. Still, a two-day recovery in stocks has put the S&P 500 on track for a first weekly gain in four as traders took advantage of lower valuations.

While equities are still holding up relative to bonds, there have been no monthly flows into stocks over the past half-year, the BofA strategists said. “Bonds hate inflation, equities hate recession” and risk sentiment is “appalling,” they wrote.

Deutsche Bank AG strategists said this week that US stocks could slide a further 25% if the economy tips into recession, with risks to a sustained equity rally mounting. Meanwhile, Morgan Stanley’s Michael J. Wilson — one of Wall Street’s biggest bears — turned even more pessimistic on the outlook for US earnings against the backdrop of a slowdown in economic growth.

The BofA strategists said fiscal support from European countries and the UK “delays recession, boosts stocks,” and worsens the outlook for inflation, debt and yields.

Still, Hartnett and his team said markets are hinting at peak cyclical yields in the next three to six months, which they see as good news. At the same time, BofA’s custom bull-and-bear indicator fell to the zero mark, or “maximum bearish” level, which is often seen as a contrarian buy signal.

In Europe, the exodus of flows continued for a 30th straight week. In terms of equity flows by style factors, US small caps, value, growth and large cap saw redemptions.