Although stocks have rallied from their most recent lows, they could have to fall further, according to Bank of America. “The S&P 500 is up 13% from June lows, but we think it’s premature to declare a ‘big low’ in the market and see room for more downside,” wrote ETF and investment strategist Jared Woodard in a note on Tuesday. Political Risks There are a few reasons why Bank of America isn’t so sure the recent rally will hold. First, looser financial conditions today will likely lead to tighter policy tomorrow, the note said. So far, only about 30% of the indicators that usually precede a market bottom have been activated. These indicators include things like rising unemployment rates, the Federal Reserve starting to cut interest rates, falling earnings estimates and the 2-year Treasury yield falling at least half a percentage point, which doesn’t has happened in this market. cycle yet Bank of America analysts generally look for 80% or more of these indicators to have flashed before they think a market bottom is near. Beyond the bull market indicators, inflation is also too high for the Fed to ease from its hawkish path. Higher rates are generally a drag on stock prices, and at this point they are likely to be hiked for at least a few straight central bank meetings. Too much optimism There are also few signs of investors capitulating, which is usually a sign that the market has bottomed out and will start to recover again. Stocks have seen $180 billion in capital inflows year-to-date, while $340 billion has gone into exchange-traded funds, according to Bank of America. Through the second half of 2022, BofA clients have been net buyers, not sellers, of US stocks. This is important because US domestic investors are one of the largest parts of the stock market, accounting for $38 trillion in assets, or about 52%. Previously, the last three market lows occurred one or two quarters after this cohort began selling. All of this has Bank of America thinking the stock’s recent gains are a bear market rally rather than a sprint into a new bull cycle. “We remain tactically cautious,” Woodard said. “Use bear market surges to raise cash and rotate into higher quality assets. Hold dividend and bond coupon reinvestments on hold and use tax loss harvesting techniques ahead of better buying opportunities this year.”
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