Bank of America flags caution as investors pour $40 billion into the stock market

As the holiday and Santa Rally season draws near, one Wall Street bank is telling investors to curb their enthusiasm where stocks are concerned.

A contrarian “buy” signal for stocks has now expired, weeks after it was triggered, said a team at Bank of America led by strategist Michael Hartnett on Friday.

On Oct. 20, the strategists flagged that their Bull & Bear Indicator was in “extreme bearish” territory at 1.9 from a previous 2.2. A contrarian buy signal for riskier assets is triggered when the bank’s so-called Bull & Bear Indicator drops under 2.0.

But on Friday, they reported that indicator had crept up to 2.1 from 1.7 and pushing it into “neutral” territory, as this chart shows:

The indicator has risen as some investors have had a love-in with stocks lately. In its latest Flow Show report that is released every Friday, the bank reported the biggest two-week inflow to stocks — $40 billion — since February 2022.

Hartnett has cautioning that investors have had a collective one-track mind when it comes to the view that the Federal Reserve is done with interest-rate hikes, with almost no contrarian views out there. In Bank of America’s November survey 80% of fund managers said they expected lower interest rates, with 82% calling for lower inflation and 61% for lower bond yields.

Read:Stock-market investors are convinced the Fed is finished with rate hikes. Why it isn’t a done deal.

The analyst and his team have cautioned that the 10-year Treasury yield could make for a difficult year to come, with 4% to 5% “risk on” for markets, but a drop to 3% to 4% likely to spark recession talk, a more bearish risk.

The latest week ended Nov. 21 saw $40 billion flowing into cash instruments, with $16.5 billion to stocks, $4 billion in bonds and $700 million to gold.

And cash has clearly been the winner this year, with Bank of America reporting that $1.2 trillion has flowed into those short-term instruments, short-term instruments like 3-month bills
Some $186 billion has gone to Treasurys, and $143 billion to equities.

Read: This banking giant has been saying cash is king. Now it advises a switch to stocks.

With just a few days left to finish November, the S&P 500
has gained 8.6%, which if the level holds, would mark the best monthly return for the index since July 2022, according to FactSet.

The index got a big boost last week when a subdued inflation reading sparked a buying frenzy and the best day for the S&P 500 and Nasdaq since April. The inflation data fueled hopes that the ground has been laid for a year-end rally for stocks.

While Hartnett and his colleagues have expressed caution, the bank’s head of equity and quantitative strategy, Savita Subramanian, said she expects the S&P 500 index will end next year at 5,000, a 10% gain from here.

Part of the reason is “too many skunks at the party,” she says, referring to  “conviction-less equity bears,” apart from AI enthusiasts and fund managers and others sitting on lots of cash. Her 2023 forecast of 4,600 for the S&P 500 is looking far more accurate, unlike the majority of her overly cautious Wall Street rivals. 

Read: RBC and BofA see S&P 500 heading to 5,000 in 2024, but here are 10 reasons why investors should still tread carefully

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