The stock market’s “ultimate lows” are still ahead because investors haven’t capitulated yet, says B. of A.
Investors haven’t capitulated in this year’s battered stock market, according to strategists at B. of A. Global Research.
With recent fear and “loathing” suggesting stocks are subject to a bearish rally, “we don’t believe ultimate lows have been reached,” B. of A. investment strategists said in a report. research dated May 12. they said, it’s “investors who sell what they like.”
US stocks rallied on Friday, with the S&P 500 SPX,
Dow Jones DJIA Industrial Average,
and Nasdaq Composite COMP,
closing significantly higher. Still, all three major benchmarks recorded another week of losses, with the Dow Jones suffering its seventh consecutive weekly decline for its longest losing streak since July 2001, according to Dow Jones Market Data.
The “exodus” has begun, but only three of the 10 “surrender indicators” tracked by B. de A. have ticked off, according to the strategists. These three elements include liquidity levels and investors’ expectations for earnings and economic growth, the report said.
Below is the checklist of these indicators, some of which relate to the bank’s global surveys of fund managers. It shows how today’s market is weathering the bursting of the dot-com bubble, the global financial crisis, the European debt crisis, and the rapid and steep drop caused by COVID-19 fears in 2020.
Capitulation indicators related to interest rate expectations, stock flows, stock allocations from Bank of America Corp. and asset allocations to stocks and bonds seen in B. of A.’s fund manager surveys, have yet to be checked off.
Rate cut expectations are still being seen at the bear market low, strategists said.
Investors were expecting interest rates to rise as the Federal Reserve signaled it would continue to raise its benchmark rate to combat high inflation.
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For every $100 of inflows over the past few weeks, strategists have seen “only $4” in redemptions, according to the report. That compares to more than $50 outflows for every $100 inflows in past bear markets, the strategists wrote.
Share buybacks so far amount to 0.2% of assets under management, or AUM, depending on their rating. Strategists said outflows were around three to six percent of assets under management at previous lows.
To meet B. of A.’s capitulation criteria, fund managers should be underweight equities, with lows requiring a -20-30% allocation to equities and investors closing out underweight bond positions, said the strategists. In addition, private clients of Bank of America’s global wealth management and investment unit reduced their equity allocations to at least 56% during past bear market lows, they wrote in the report.