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The Tell: BofA is selling U.S. equities rally on worries that unemployment will be ‘shocking’ in 2023

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Strategists at BofA Global Research said it is time to sell the U.S. stock market rally ahead of a potential surge in the unemployment rate next year. 

“Bears (like us) worry unemployment in 2023 will be as shocking to Main Street’s consumer sentiment as inflation in 2022,” strategists led by Michael Hartnett, chief global equity strategist at BofA Global, wrote in a weekly note. “We (are) selling risk rallies from here as the markets (are) too aggressively front-running a negative ‘the pivot is here’ payroll.”

The U.S. created a robust 263,000 new jobs in November, a historically strong pace of hiring which threatens to prolong a bout of high U.S. inflation, raising concerns that the Federal Reserve’s policy will remain tighter for longer. The unemployment rate held at 3.7%, while the average hourly earnings rose twice as much as the Wall Street’s forecast. 

However, the BofA’s Bull & Bear Indicator jumped to 2.0 from 1.4 in the week through Nov. 30, which indicates a “buy signal” for risk assets is close to an end, according to analysts. “The indicator stood at the highest since May 2022 on more bullish bond inflows, credit technicals, equity breadth, (and) hedge fund positioning.” 

That sentiment was echoed by other Wall Street banks. JP Morgan Chase & Co.’s Marko Kolanovic, once one of Wall Street’s most vocal bulls, called for equity prices to stumble early next year, and argued the rebound in stocks was overdone after October, as the Federal Reserve’s interest-rate rises batter the U.S. economy. Morgan Stanley’s Michael Wilson, one of the most vocal bears who correctly predicted this year’s stock-market selloff, also suggested stocks will make a new low in the first quarter of 2023.   

See: Why October’s yield curve inversion might not spell doom for U.S. stocks in 2023

Investors withdrew $14.1 billion out of global equity funds over the past week. It was the biggest weekly outflows in three months, with $6.1 billion of which being withdrawn from exchanged traded funds and $8.1 billion from mutual funds, according to BofA Global strategists, citing EPFR Global data on Friday. Meanwhile, U.S. equity funds saw a total of $16.2 billion outflows in the week to Wednesday, the biggest since April.

In 2022, BofA said equity funds had seen a total inflows of $207 billion, below the “euphoric inflows” of the previous year. In contrast, outflows from credit funds in 2022 of $316 billion have unwound all inflows of 2021. (See chart below)

SOURCE: BOFA GLOBAL INVESTMENT STRATEGY, EPFR

U.S. stocks finished mostly lower on Friday with the S&P 500
SPX,
-0.12%

dropping 0.1%, while the Dow Jones Industrial Average
DJIA,
+0.10%

slightly gained 0.1%, after trading in the red for most of the session. The Nasdaq Composite
COMP,
+1.87%

ended 0.2% lower. For the week, the large-cap index rose 1.1%, while the Dow gained 0.2% and the Nasdaq advanced 2.1%, according to Dow Jones Market Data.

Bond Report: 2-year Treasury yield jumps to 4.3% after November jobs data but finishes week lower

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