Bank of America Sees Shift in Investor Sentiment

Bank of America's Michael Hartnett recently revealed that investors have reversed their sentiments and are now directing their money back into stocks. This shift marks a significant change after experiencing the largest outflow earlier this year. However, this move has resulted in the biggest weekly outflow from bonds since March.

Hartnett and his team regularly publish their "Flow Show" report every Friday, providing insights into the latest market trends. Their analysis, based on data from EPFR on exchange-traded fund and mutual-fund flows, indicates that investors allocated $11.7 billion to global stocks. At the same time, $3.6 billion was withdrawn from bonds, and $12.9 billion from cash during the week up until Wednesday.

This comes after a significant outflow of $16.9 billion in the equity market during the week ending September 20, the largest outflow seen since December.

In addition to the fund flow update, Hartnett shared some compelling charts supporting his bearish outlook on stocks. He advises his clients to remain cautious and adopt a defensive strategy, suggesting that they should sell the last hike.

Hartnett also expresses concerns about the potential consequences of the Federal Reserve's interest rate hikes. He believes that these hikes may lead to further disruption in the financial markets, following the regional banking turmoil experienced in March.

While Fed officials have indicated that they plan to raise interest rates once more before the year's end, they also anticipate keeping rates steady but at higher levels in 2024 – a development that Hartnett finds noteworthy.

Overall, Bank of America's report highlights the recent shift in investor sentiment, as they move their investments back into stocks but withdraw from bonds. Hartnett's cautionary stance reflects his concerns about potential disruptions in the market and urges clients to remain defensive.

The Bank of Japan and Global Markets

Strategist Michael Hartnett has issued a warning regarding the Bank of Japan and its potential to create a shock wave in global markets. A major cause for concern is the possibility of the bank abandoning its policy of tightly controlling Japanese government bond yields. This outcome is becoming increasingly likely as consumer-price inflation in the country reaches its highest level in decades.

The Yen and Its Impact

Hartnett highlights that a 20% surge in the value of the yen, which currently stands at a 52-year low against the U.S. dollar in real terms, could trigger a "global credit event." This potential scenario underscores the significance of Japan's economic decisions and their global implications.

The Long-Term Outlook

Looking ahead, Hartnett remains confident that "cash, commodities, real assets" will outperform financial assets like bonds and stocks throughout the 2020s. He points out that real assets are currently scarce, relatively inexpensive (compared to financial assets reaching historic lows), and under-owned. Furthermore, these assets serve as an effective hedge against inflation and aid in diversifying portfolios.

Hartnett asserts, "All individual real assets are positively correlated with inflation," providing data that highlights the highest correlation between the price of diamonds, U.S. farmland, gold, and the U.S. Consumer Price Index (CPI) inflation rate since 1950.

Performance Comparison

In 2023, commodities have outperformed stocks, with crude oil being a notable example. West Texas Intermediate crude has seen a rise of over 13% since the beginning of the year, currently trading at $90.84 per barrel. In contrast, the S&P 500 has gained 11.7% year-to-date through Friday afternoon, according to FactSet data. At the time of writing, the index was down 10.93 points or 0.3%, at 4,288.