‘Summer of Volcker’: No Big Low in Stocks Before Big High in Yields and Inflation

By Senad Karaahmetovic

The Fund Manager Survey (FMS) results for June point toward a “deeper investor mystery” with the BofA Bull & Bear Indicator down to as low as 0.2, according to the bank’s top investment strategist Michael Hartnett.

“Wall St sentiment is dire but no big low in stocks before big high in yields & inflation, and the latter requires uber-hawkish Fed hikes in June & July,” Hartnett wrote in a client note.

FMS showed that investors’ optimism on global growth is at record lows with the stagflation fear at the highest since June 2008. The survey also showed that CIOs are advising CEOs to “play safe” with 44% wanting stronger balance sheets, 30% look for capex and 18% want buybacks.

“Net 79% expect higher short rates…compared with prior market lows when net 53% (average) expected lower rates; what makes Fed pause/pivot? PCE inflation 300k say 20%, SPX

The strategist also added that FMS cash levels are now down to 5.6% from 6.1%. The survey results also showed that the most crowded trades are long oil/commodities and long dollar.

In a separate client note, BofA strategist Jill Carey Hall reflected on last week’s equity client flow trends after the closed 5.1% lower in the biggest move lower in 5 months.

The strategist noted the biggest net sales of stocks since April with the bank’s clients being net sellers (-$1.7 billion) overall. This marks the biggest outflow since April with clients selling ETFs mostly.

“Selling was led by institutional clients, who were sellers for the third consecutive week. Hedge funds were also net sellers for a fourth consecutive week, while retail clients were net buyers for a fourth consecutive week. Retail clients have been more aggressive buyers of dips this year after missing out on what was generally a successful strategy post-Global Financial Crisis,” Carey Hall told clients in a note.

As far as sectors are concerned, clients were buying stocks in 6 out of 11 sectors. Energy and Health Care saw the largest inflows with the former witnessing the eighth-largest inflow since 2008.

Despite huge inflows, the strategist sees more room to run as active funds are still “very underweight Energy.”

On the other hand, Tech and Financials saw the largest outflows last week.

“No sector has seen more than two consecutive weeks of inflows or outflows (except Materials, which has seen muted inflows since early May), suggesting lack of sector conviction. But in aggregate, cyclical sector flows have continued to outpace defensive sector flows, suggesting clients do not view recession as imminent,” Carey Hall added.