Fed Rate-Hike Pause No Reason to Buy Stocks, BofA Says

(Bloomberg) — The Federal Reserve may be signaling its willingness to pause rate hikes, but Bank of America Corp.’s Michael Hartnett says it’s not yet time to buy equities as outflows accelerate amid elevated inflation and recession fears.

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Redemptions from global stock funds reached $6.6 billion in the week through May 3 — the most in more than two months, according to a note from the bank citing EPFR Global data. Inflows into cash funds surged to nearly $60 billion, while $11 billion entered bonds, the data show.

Hartnett — who correctly predicted the equity exodus last year — said that a “new structural bull market requires big Fed easing,” which in turn needs a “big recession.” Resilience in the labor market and price pressures that remain sticky, however, are likely to prevent the Fed from pivoting to cut rates. The strategist reiterated a call to “sell the last rate hike” in the note dated May 4.

April employment data released Friday reflected job growth that remains historically strong, tempering expectations for an imminent economic downturn.

Nonfarm payrolls rose 253,000 last month after a downwardly revised 165,000 increase in March — more than economists expected — while the unemployment rate fell back to a multi-decade low of 3.4%, the Labor Department’s latest monthly report showed. Meanwhile, wage pressures remained persistent. Average hourly earnings rose 0.5% in April, the most in about a year on an unrounded basis, and were up 4.4% over the year.

US stocks rallied following the release. The S&P 500 advanced 1.1% as of 9:37 a.m. in New York, while the tech-heavy Nasdaq 100 gained 0.9%.

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After posting a second straight monthly gain in April, US stocks have pulled back in the early days of May amid prospects of higher-for-longer interest rates and renewed turmoil in the banking sector. Friday’s push higher comes after the longest losing streak for the S&P 500 since February.

The Fed hiked interest rates by 25 basis points this week and hinted it could be the last one for now. After April’s jobs report, market pricing indicated investors now anticipate a pause in June is the most likely outcome.

BofA’s Hartnett said the “big story of 2023” remains an “imminent recession,” which will damage the “Goldilocks” resilience of credit, technology stocks and homebuilders, while creating opportunities in so-called hard-landing assets such as oil, small caps and banks.

Other key highlights from the note:

• US equity funds had a third straight week of outflows at $8.8 billion, while redemptions from European funds continued for an eighth straight week

• All investment styles showed outflows: US growth, small cap, value and large cap

• By sector: tech and consumer had the biggest inflows, while energy and financials saw the most outflows

• Money-market funds had $588 billion inflows in the past 10 weeks; they surged by $500 billion after the Lehman Brothers crash and $1.2 trillion after Covid

–With assistance from Michael Msika.

(Updates with April jobs report figures and for market open.)

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