BofA Warns of Looming Unemployment Shock, Recommends Selling Stock Rallies

Analysts at the Bank of America (BofA) warn of a deterioration in the US labor market and a possible increase in unemployment next year.

They also suggested selling the stock market rally ahead of a possible increase in job losses.

“Bears (like us) are worried unemployment in 2023 will surprise Middle Street consumers like inflation in 2022,” said BofA strategist Michael Hartnett, who revealed that global equities could see their weekly outflows in three months.

“We are selling risk exposure from here,” he said, reiterating his preference for bonds over equities in the first half of 2023.

BofA’s Bull & Bear Indicator rose to 2.0 from 1.4 in the week to Nov. 30, indicating that the “buy signal” for risky stocks is over, according to analysts.

“Indicators are higher since May 2022 for excess bond inflows, credit technology, equity breadth, (and) hedge fund placements,” they said.

The analysts’ view is similar to that of their peers at JPMorgan Chase and Goldman Sachs Group, who have warned of a possible recession next year.

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Equity Funds are starting to see outflows

Global equity funds saw $14.1 billion in weekly outflows in Nov. 30, led by the outflow of US stocks, the biggest weekly outflow in three months, according to BofA strategists.

They also said $6.1 billion was withdrawn from mutual funds and $8.1 billion from mutual funds, citing EPFR Global data.

US equity funds saw $16.2 billion in outflows during that period, the most since April.

They also reported that nearly $2.4 billion left the global bond market, with cash flows seeing an inflow of $31.1 billion.

Large-cap U.S.-based stocks accounted for $14.5 billion, with U.S. small-cap stocks, growth, and value funds also seeing releases.

Long-term investor optimism over a tepid labor market and signs of easing interest rate policy from the Federal Reserve is overstated, Harnett’s team said.

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Labor Market Remains Firm, Long-Term Economic Outlook Remains Dim

The labor market still looks strong for now, as 263,000 nonfarm jobs were added to the U.S. workforce in November, more than 200,000 expected, according to the government’s Dec.

Meanwhile, average wages rose 0.6 percent in October, 5.1 percent above the same period in 2021.

The US unemployment rate is holding at 3.7 percent.

“Small business jobs are hard to fill (in line with Fed funds) and peak in the Atlanta Fed wage tracker,” said BofA strategists, “but bulls need wage growth to slow significantly without major job losses.”

Fed Hints at Slowdown on Interest Rate Hikes in December

Stocks on Wall Street have seen a rebound since October, on hopes that the central bank will lower inflation in time to avoid a major recession.

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Investor behavior was boosted, after Fed Chairman Jerome Powell announced on November 30 that the Fed might begin to slow the pace of inflation at its next meeting in December.

The central bank is expected to cut its next rate hike to 50 basis points, after a string of four consecutive 75 basis point hikes.

However, the strong November jobs report is the last monthly employment report before the Fed’s two-day meeting Dec. 13-14.

The news is a sign to some economists that demand for labor is still very strong, which could delay a pivot in central bank policy next year.

The tech-heavy Nasdaq 100 fell 0.1 percent, after losing 1.2 percent on the news of the report.

Bryan Jung

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Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.

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