Bank of America strategists noticed a swift equity sell-off, the fastest since December. Investors are rapidly selling stocks. They are worried that ongoing high-interest rates could cause a hard landing for the US economy.
In the week ending on September 20, global equity funds saw $16.9 billion in outflows, with US stock funds leading. Bank of America’s Michael Hartnett, who leads the bank’s team, cautions that persistent high rates could trigger a hard landing and economic downturn by 2024, adding to market disruptions.
On Wednesday, Stocks plunged after the Federal Reserve’s announcement that interest rates would stay elevated longer than expected. The S&P 500 dropped over 2% in two days, while the 10-year Treasury yield reached its highest point in 15 years.
BofA strategists warn about prolonged high-interest rate risks
In their weekly “Flow Show” note, BofA strategists, led by Michael Hartnett, warned that prolonged high-interest rates could lead to the economy experiencing a difficult start in the first half of next year.
Hartnett and his BofA team believe that “lower-for-longer” rates and yields led to a bubble and boom in the 2010s and 2020/21.
However, they now caution that “higher-for-longer” rates could result in hard landing risks and potential bubble pops and busts in the first half of 2024.
This analysis comes as the Federal Reserve recently signaled their intention to keep benchmark interest rates unchanged in the range of 5.25%-5.5% but indicated a commitment to keeping borrowing costs elevated for an extended period by revising their rate cut projections for 2024.
Hartnett’s note from September 21 highlighted early signs of impending economic challenges. These include a steepening yield curve, rising unemployment and personal savings rates, and increased defaults and delinquencies.
Despite the S&P 500’s 13% gain this year, reaching 4,330, its momentum has slowed since late July, a slowdown attributed to the Federal Reserve’s signal of potentially sustaining higher interest rates for an extended duration.
The S&P 500 and Nasdaq 100 are both headed for their most substantial monthly decline since the previous December. This reflects the current market situation and the potential hard landing.
Market strategists wary of hard landing risks
The Federal Reserve’s updated projections, leaning towards higher interest rates, have fueled discussions about the risk of a hard landing in the economy, prompting market strategists to reevaluate their outlook.
Concerns are mounting, with market strategists like JPMorgan’s Marko Kolanovic warning about the risks posed to the US equity market by increasing real rates and constrained capital costs.
Morgan Stanley’s Michael Wilson has also noted that clients expect a more challenging outlook for stocks in 2024.
Hartnett emphasized the importance of observing how the market responds to the performance of leading stocks when bond yields decline. It can be a critical factor in shaping future trends and raising concerns about the possibility of a hard landing.
If lower yields trigger another rally in US homebuilders and chipmakers, it could signal a bullish trend. However, if these stocks don’t respond positively, it’s a sign to “sell the last rate hike and revert to ‘Bear4000,'” he noted.
The note also pointed out that global bond funds recorded their 26th straight week of inflows at $2.5 billion. In comparison, cash funds experienced an outflow of $4.3 billion.
Tom Lee challenges the market’s reaction to the Fed’s hawkish stance
But Tom Lee, Fundstrat’s head of research, suggests that the market’s response might be excessive or exaggerated. Lee has a contrasting view of the market’s reaction to recent events and response to potential hard landing risks.
Lee doesn’t consider this to be a significant concern. He believes the Fed’s forecast of higher rates for a more extended period is justified by the central bank’s improved outlook for GDP.
Tom Lee, the head of research at Fundstrat, believes that the market’s response to the FOMC meeting may have been excessively hawkish. He expressed this view in a video for clients after Thursday’s market close.
Lee disagrees with a critical driver of market sentiment; specifically, the Federal Reserve’s updated Summary of Economic Projections (SEP) indicated a leaning towards one more interest rate hike this year and a longer period of higher interest rates in 2024 and 2025 than initially anticipated.
Fed chair: Economic growth key for rate hike, not just inflation
During his press conference, Fed Chair Jerome Powell mentioned that economic growth, which the Fed anticipates reaching 2.1% this year (up from their previous forecast of 1% in June), would be the primary factor driving another rate hike, rather than solely inflation.
On Thursday, the Bank of England also decided to keep its key interest rate unchanged, marking the first time it has done so since November 2021. This decision comes as inflation shows signs of easing, and the UK economy is at risk of contracting.
