Investors Are Dumping Equities and Cash Amid Fears of Hawkish Fed, BofA Says

(Bloomberg) -- Investors are dumping equities and cash alike in favor of bonds as they position for the risk that the Federal Reserve persists with hawkish policy moves, Bank of America Corp. strategists said.

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Global equity funds lost $7 billion in outflows in the week through Feb. 22, while $3.8 billion left cash funds, according to a note from the bank, which cited EPFR Global data. At $4.9 billion, bonds drew additions for an eighth straight week in the longest such streak since November 2021, the team led by Michael Hartnett said.

US stocks have dropped in the past three weeks as signs of sticky inflation fanned fears that the Fed could pursue higher interest rates for longer. Figures out Friday showed the Fed’s preferred inflation metrics accelerated more than expected in January and consumer spending increased by the most since 2021. US stock futures extended declines after the data.

The first quarterly drop in corporate earnings since 2020 has also damped risk demand, and Wall Street market strategists including Michael Wilson at Morgan Stanley have warned that equities could see deep declines over the next few months.

Bank of America’s Hartnett reiterated his view that the S&P 500 could slide to 3,800 points by March 8 — implying declines of more than 5% from its latest close. The strategist’s call is underpinned by expectations that resilient growth in the first half of the year will coincide with higher interest rates and lead to a sharper economic slowdown in the second half. Citigroup Inc. strategists also said on Friday that a US recession is eventually likely.

In contrast to the general trend, BofA private clients made the largest additions to stocks in eight weeks.

Among regions, emerging-market stock funds attracted inflows of $2.1 billion in the week, while US equities had redemptions for a third straight week at $9 billion. Outflows also resumed from European funds. By style, US value and small cap saw additions, while money left growth and large cap funds. Energy led sectoral inflows, and materials and financials saw the biggest outflows.

(Updates with latest US inflation data and US stock futures in third paragraph)

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