Stocks have scored an impressive rebound in recent weeks, with the S&P 500 gaining 13% since June 16.
The rally has stemmed from signs of economic weakness that have helped spark declines in real rates, speculation that the Fed may turn more dovish and some better-than-expected earnings report.
U.S. stock funds saw a net inflow of $9.5 billion last week, the biggest sum in the last six weeks according to BofA.
So will the rally continue? No, say Bank of America strategists led by Michael Hartnett.
‘A Bear Rally’
“We remain of view this is a bear rally,” the analysts wrote in their weekly commentary about investment flows. They said they would sell stocks if the S&P 500 exceeds 4,200, which would represent a 1.5% rise above the recent level of 4,138.
The index’ “true lows” are below 3,600, down 13% from the recent level, the strategists said. To be sure, “it makes sense” that stocks are rising as bond yields are falling, they said.
“Recession shock has allowed” the 10-year Treasury to slip from 3.5% June 14 to 2.64% recently, they said. The analysts are referring to heightened expectations of recession.
Those expectations especially heightened after news that the economy contracted at a 0.9% annualized rate in the second quarter. The economy shrank 1.6% in the first quarter.
Inflow to Bonds
Bond funds enjoyed an influx of $3.6 billion last week, the largest since March, BofA said. But “Treasuries say it’s too early to position for a dovish Fed pivot,” the strategists said.
Treasury yields remain way up year to date, especially at the short end of the curve. The three-month Treasury recently yielded 2.33%, up from just 0.06% at the end of 2021.
“Once the labor market turns recessionary, [with jobless] claims already up, bonds will outperform stocks,” the strategists said.
