BofA Says Investors Wary of Fed Pull Money From Stocks and Bonds

(Bloomberg) — Investors are rushing out of stocks and bonds alike as they worry about the economic risks from the Federal Reserve pressing on with rate hikes, according to Bank of America Corp. strategists.

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Global equity funds had outflows of $5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a note from the bank, citing EPFR Global data. Rate-sensitive technology funds posted their largest exodus since November 2021, while high-yield bonds led redemptions of $800 million from global bond funds. About $600 million left gold, the data show.

The sharp summer rebound in stocks has faltered in recent weeks as investors fretted over a potential recession, with Fed officials signaling they will stay hawkish to fight historic inflation. All eyes are on Fed Chair Jerome Powell’s speech at the Jackson Hole symposium later Friday, where he’s expected to restate the central bank’s resolve to keep hiking interest rates for now.

Bank of America strategist Michael Hartnett has remained of the view that it’s too soon for financial markets to expect a Fed pivot as inflation remains stubbornly high. With commodity prices slated to rise further given the war in Ukraine and resilient US labor and housing markets, “rates need to overshoot to reduce inflation,” he said in the note dated Aug. 25.

Although bond yields have pulled back from a high in June, Hartnett said he doesn’t think they have peaked yet.

The “sooner the Fed plays role of ‘the courageous lion,’ the better for macro, better for markets,” Hartnett wrote.

JPMorgan Chase & Co. strategists, on the other hand, said earlier this week they expect the last of the Fed’s big rate hikes in September, allowing stocks to extend their rally into the end of the year.

In terms of equity flows by style factors, US value had inflows, while large caps, growth and small caps saw redemptions. By sectors, financials and utilities led additions, while technology experienced the biggest outflows.

Bank of America’s custom bull-and-bear indicator remains at the zero mark, or “maximum bearish” level, which is often seen as a contrarian signal to buy.