Concerns over a robust U.S. economy and persistent inflation are leading investors to withdraw from equity markets, driven by fears that the Federal Reserve may maintain elevated interest rates for an extended period, say strategists from Bank of America Corp.
According to a report by Michael Hartnett and his team, the perception that positive economic indicators are now detrimental for stocks marks a significant shift from earlier in the year, when such news was welcomed. This change in sentiment is evidenced by the withdrawal of $21.1 billion from stock funds over a two-week period ending Wednesday, the largest fortnightly outflow since December 2022, based on data from EPFR Global.
The decline in stock investments in April, following a robust first quarter, is attributed to traders reducing their expectations for rate cuts amidst rising inflation and strong job market figures. Additionally, escalating tensions in the Middle East are dampening risk appetite, with concerns that it may lead to increased energy prices, further postponing the easing of central bank policies.
Hartnett notes that while some investors view the recent market pullback as a healthy correction, others are becoming increasingly cautious about U.S. growth stocks due to their difficulty in achieving new highs. Moreover, the high-yield bond market is showing worrying signs that could indicate a shift towards a scenario where 'bad news equals bad outcomes,' he added.
The report also highlights significant weekly cash flows, with nearly $160 billion exiting cash funds and bonds receiving $5.7 billion in investments.
