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Bank Of America warns of ‘manual’ bear market rally, predicts new lows for stocks

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Although stocks have made a stunning comeback from June lows as investors grow more optimistic about slowing inflation and the Federal Reserve may scale back interest rate hikes, the recent rebound is nothing. more than a “classic bearish” rally that is likely to reach new lows. , according to analysts at Bank of America.

Highlights

The stock market’s summer rally appears almost over, according to a recent note from Bank of America chief investment strategist Michael Hartnett, who points to data suggesting the recent gains are a “typical” bearish rally that is poised to unravel. soon run out of steam.

The S&P 500 has jumped more than 15% since hitting a low for the year in mid-June, largely on better-than-expected economic data, including a strong jobs report and a drop in consumer prices in recent weeks.

Despite investors’ hopes that the worst is over after a sharp selloff in the first half of 2022, Bank of America analysts are among the pundits who have ratcheted up warnings in recent weeks that stocks need to fall further.

“Everyone is bearish, but no one has sold stocks,” says Hartnett, pointing to irrational trading activity in meme stocks and adding that after four straight weeks of gains, the market is showing many characteristics of this which is likely to be a “self-destructor”. rally.”

The Bank of America analyst points to the fact that out of 43 bear market rallies since 1929 in which the S&P 500 has gained more than 10%, the average increase is around 17.2% over 39 trading days, which means that the current rally seems to be at its maximum. , based on historical data.

Moreover, even after raising the fed funds rate by 2.25% so far this year, the Federal Reserve is ‘far from done’ with rate hikes to fight inflation, he warns. , which will likely cap recent market gains.

To monitor :

Other analysts at the firm have issued similar warnings in recent days. Bank of America’s head of U.S. equities and quantitative strategy, Savita Subramanian, said in a note to clients on Tuesday that stock market valuations remain far too high for the bear market to be over. A sustained bull market remains “unlikely,” she wrote, citing indicators that instead signal an impending end to the recent bear market rally.

Surprising fact:

A bear market rally tends to “always shrink” in terms of leadership, Hartnett adds, pointing to the fact that companies like Apple, Amazon and Tesla have accounted for outsized portions of the recent market rally. These three stocks have each risen more than 30% since the market low on June 16, far outpacing the benchmark.

Further reading:

Ford, Tesla and Netflix are among the best performing stocks in this summer’s massive rally (Forbes)

The stock market crash is not over, according to the indicator with a “perfect” balance sheet (Forbes)

Fed officials pledge to raise rates further until there is a “significant” drop in inflation (Forbes)

Some Experts Warn of a “Bear Market Rally” – Here’s Why Stocks Could Hit New Lows (Forbes)