In a somewhat more cautious stance compared to other financial experts on Wall Street, Bank of America’s strategist suggests that the S&P 500 index can maintain its position above 4,200 points in the immediate future, given certain conditions. A potential drop below this level would hinge on a stronger US dollar, rising yields, the price of oil exceeding $100 per barrel, and unmistakable signs of a credit squeeze affecting small businesses and leading to increased unemployment. These insights were shared in a recent note by Hartnett, dated October 12.
The 4,200-point threshold is significant because it closely aligns with the benchmark index’s 200-day moving average, a critical technical indicator that traders use to gauge the prevailing long-term market trend. In early October, the S&P 500 nearly touched this level as US bond yields reached their highest point in 16 years. Following a retreat in yields, the index subsequently rebounded by 2.8%, currently demonstrating its second consecutive weekly gain.
Looking ahead to 2024, Hartnett suggests that the most optimistic scenario involves a recession and Federal Reserve interest rate cuts, driving gains in bonds, gold, and fostering a broader stock market rally. It’s noteworthy that despite the S&P 500’s impressive 13% surge in 2023, the strategist maintains a bearish outlook for the year.
Hartnett emphasizes that for investors to shift their focus away from money market funds, which have seen substantial annualized inflows totaling $1.4 trillion this year, they would need to witness an economic downturn along with interest rate cuts. This combination would encourage investors to reallocate funds into other assets and breathe new life into bullish market sentiment.
Additional key points from the report:
- A net outflow of approximately $8.2 billion was observed from global stock funds during the week ending October 11, while cash funds attracted $16.9 billion, and bond funds saw an inflow of $3.7 billion, based on data from EPFR Global.
- Bank of America’s Bull & Bear indicator has fallen to 2.2, its lowest level since April. This decline is attributed to concerns about weak equity market breadth and notable outflows from high-yield/emerging market bonds, as well as developed market equities.
- A contrarian buy signal may emerge within the next two to three weeks if more than $8 billion flows out of developed market stocks, and the October fund manager survey conducted by Bank of America paints a bearish picture.
- In terms of fund flows, US stocks have experienced outflows amounting to $3 billion, and European fund redemptions have now extended for 31 consecutive weeks.
