By Senad Karaahmetovic
While the U.S. equities are likely to rally in the final quarter of the year given extremely bearish positioning, the market is likely to return to trading lower in coming months, according to Bank of America Strategists.
Recession is coming, warn the strategists. The "recession shock" will result in new highs in credit spreads and new lows for the stock market, most likely in the first quarter of the next year.
"Recession trade is always long bonds, short stocks; long yield curve steepeners & commodities, short US$ hedges premature policy pivot,” the strategists said in a client note.
The strategists noted that the long-term return from U.S. government bonds crashed to a 50-year low of 0.7% from 9.7% in March 2020.
"US Treasuries annualizing 23% loss YTD, worst since 1788 & 2nd straight annual loss; last time 2 straight years of UST losses…1958-59, last time >5% UST loss followed by -ve return…1861; last time 3 straight years of US government bond Treasuries…never; 250 years of history say US Treasury returns up in 2023," the strategists added.
In the week to Wednesday, October 26, as much as $28.4 billion went to cash and $22.9 billion to equities - which is the largest inflow in 7 months. Robust tech inflows were mostly fueled by the tech sector ($2.3 billion). The risk-on rally also saw the largest inflow to emerging markets equities since April and to financials in 9 weeks.
The strategists also noted that the Bank of America Bull & Bear Indicator remains at 0, signaling the "max" bearishness for the 6th consecutive week.
"Sentiment as we all know [is] still best case for Q4 rally," the strategists conclude.