The ‘ultimate bottoms’ of stock markets are yet to come as investors haven’t capitulated yet, says B. von A.

According to strategists at B. of A. Global Research, investors have not capitulated in this year’s battered stock market.

With recent fear and “loathing” suggesting stocks are vulnerable to a bear market rally, “we don’t think the ultimate bottoms have been made,” B. of A. investment strategists said in a research paper. May 12 report. “A true capitulation,” they said, is “investors selling what they love.”

US stocks rallied on Friday with the S&P 500 SPX,
Dow Jones Industry Average DJIA,
and Nasdaq Composite COMP,
close significantly higher. Still, all three major benchmarks posted another week of losses, with the Dow posting its seventh straight weekly decline for its longest losing streak since July 2001, according to Dow Jones Market Data.

The “exodus” has begun, but only three of the 10 “indicators of surrender” that B. of A. is tracking are ticked off, the strategists say. These three include liquidity levels and investor expectations for earnings and economic growth, the report shows.

Below is the checklist for these indicators, some of which are linked to the Bank’s Global Fund Manager Surveys. It shows how today’s market is holding up against the bursting of the dot-com bubble, the global financial crisis, the European debt crisis, and the rapid, precipitous slump triggered by COVID-19 fears in 2020.


Indicators of capitulation linked to interest rate expectations, stock flows, Bank of America Corp. retail client stock allocations. and asset allocations to stocks and bonds, seen in the B. of A. fund manager surveys, have not yet been checked off.

Rate cut expectations are always seen at bear market lows, the strategists said.

Investors have been expecting interest rates to rise as the Federal Reserve has signaled it will raise interest rates further to combat high inflation.

Read: The Fed’s tightening is “bringing with volatility” in stock markets, but this JPMorgan portfolio manager says he’s not betting on a US recession

For every $100 in inflows over the past few weeks, strategists have seen “only $4” in withdrawals, according to the report. This compares to more than $50 in outflows for every $100 in inflows in previous bear markets, the strategists wrote.

So far, share redemptions amount to 0.2% of assets under management, or AUM, their note shows. The strategists said outflows represented about three to six percent of assets under management at previous lows.

To meet B. of A.’s capitulation criteria, fund managers would need to be underweight equities, with bottoms requiring a -20% to -30% allocation to equities and investors closing underweight bond positions, the strategists said. Also, retail clients in Bank of America’s global wealth and investment management unit have trimmed their equity allocations to at least 56% in previous bear market lows, they wrote in the report. The ‘ultimate bottoms’ of stock markets are yet to come as investors haven’t capitulated yet, says B. von A.

Brian Lowry

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