Bank of America’s Hartnett says the bond market slump means the stock market hasn’t hit yet
The pressure in the bond market is also hurting stocks, which are likely to continue falling from here, according to Bank of America’s chief strategist. In normal times, investors seek the safe haven of fixed income when stocks go down. This means higher bond prices and a corresponding drop in yields. However, with central banks rapidly raising interest rates to control inflation, fears of a recession are growing and making all assets toxic to investors these days. US Treasury yields rose again on Friday, with the two-year note considered the most sensitive to a Fed rate hike, jumping 7.4 basis points to 4.2% at noon ET. Michael Hartnett, chief investment analyst at Bank of America, wrote in his weekly note analyzing the flow of money through the markets. He added that with rising consumer and producer prices and the reaction of the Federal Reserve and its global peers, “the new system of high inflation means that the secular view remains cash, commodities and volatility to outperform bonds and stocks.” The stock market on Friday was on its way to another week of losses after a midsummer rally. The S&P 500 is down more than 4.5%, while the Nasdaq 100, whose tilt toward technology stocks makes it particularly vulnerable to higher rates, is down more than 4%. Hartnett wrote that the Bank of America’s key sentiment indicator is “extremely bearish,” although that has yet to translate into a conflicting buying point. As a prescription for when investors find opportunities, Hartnett offers: “Nibble at 3600 SPX, bite at 3300, gorge at 3000.” That would translate into losses for the S&P 500 from Thursday’s close of 4.2%, 12.2% and 20.2%. The index has already lost more than 22% in this calendar year. The cautionary tone comes as other Wall Street homes are also lowering expectations. Goldman Sachs on Thursday lowered its target for the S&P 500 to 3,600 and warned that things could get worse if a Fed rate hike leads to a “hard landing” for the economy. In this case, Goldman says the index could fall 16% from current levels. Hartnett noted that policy uncertainty remains a problem. As central banks tighten, financial authorities in the US, UK and elsewhere continue to provide stimulus, offsetting the anti-inflation benefits of higher rates. “Investors want policy coordination and policy credibility, and until they get it they are more likely to squeeze things short,” Hartnett said.