Earlier this week we noted that the most confusing thing in the market at the moment is the huge dichotomy between what will be one of the worst synchronized global economic slumps in history, against what is now the largest ever intervention and bailouts.
As a result, the $64 trillion question is whether the record liquidity injection by central banks in the past month...
... will be able to offset the total shutdown of the economy, and not only result in a V-shaped recovery, but keep the economy and society virtually unchanged from its pro-coronavirus days, while allowing profits to keep growing from their previous all time high levels; and if not what does that mean for stocks. Long story short, while vocal bulls and bears have emerged on both sides of the argument, the truth is that nobody really knows what happens next even if the Fed is there to buy junk bonds that eventually default, leaving the Fed holding the bulk of post-petition equity in the US shale and retail sectors which are expected to be flooded with a deluge of defaults in the coming weeks.
In an attempt to put some order to this chaos, overnight BofA's Chief Equity Strategist summarized the prevailing trader thought as "bearish but fewer looking for retest of lows" and defined the "New consensus" in the market as follows:
- buy "what the Fed buys" (credit);
- deflationary trading range for stocks;
- own quality/growth (tech, health care),
- avoid investment ghettos (EU, EM, energy, financials)
Hartnett will also irk some traders by contending that the current "pain trade" in the market is still up, as a result of bearish positioning and bullish policy, and he expects the S&P to challenge 2018 lows of 3020. However, on the bearish side, the BofA CIO contends that the end of lockdowns will be the most likely catalyst for end of the rally. And since the reopening begins as soon as today...
... one could argue that the topping process has begun, a point Hartnett agrees with as he notes that the BofA "lockdown portfolio", which while still up from the March low has begun to underperform slightly, and is an early sign that “leadership” may temporarily peak May/June.
Whether Hartnett is right about the selling catalyst remains to be seen, but here are some factual observations on the latest weekly fund flow as compiled by the BofA strategist.
Flows to know: big $4.3bn inflows to HY bonds (inflows of $26bn in 19 of past 21 days); modest inflows to IG bonds of $5.9bn; 6th largest redemption ever EM equities ($7.4bn); 2nd largest week of inflows to healthcare funds ever ($2.8bn); 17th consecutive week into tech ($2.1bn, 6th largest ever); small inflows to energy funds ($0.2bn)…small outflow from financials ($0.3bn).
Cash mountain: $4.7tn currently in Money Market Funds; biggest inflows of year to “prime MMF’s” ($20.9bn) which were epicenter of epic March liquidation on Wall Street.
BofA Bull & Bear Indicator: pinned at 0.0 (Chart 1), i.e. investors extreme bearish; asset performance since March 17th “buy signal”…stocks 17.5%, HY bonds 2.6%, but 10- year Treasury yield -16bps...yields not rising despite extreme bearish sentiment either because a. recession to drag risk assets lower, or b. Treasuries discounting imminent “Yield Curve Control” announcement by Fed…yields lose signaling power.
BofA Private Clients: AUM has bounced to $2.4tn…was $2.6tn end-2019…$2.2tn endMarch; YTD losses have narrowed to roughly 8%, so private clients taking some profits in stocks past 2 weeks.
US leading policy panic: $6 out of every $10 of central bank asset buying in 2020 is by US Fed; $4 out of every $10 of fiscal stimulus is by US Treasury.
The bull surprises: a. policy makers need higher asset prices to prevent public or private sector bankruptcies, reduce unemployment, offset pandemic, “whatever it takes” policy continues; b. data improves…US mortgage purchasing index, BofA credit card data has stabilized, unemployment claims lower, March will be low for global PMIs & EPS revisions (Global Earnings Revision Ratio worse than 2008 in Mar).