BofA Flow Show: Three and a half big positions

May 12, 2023

3 minute read

Notes from this week's BofA Flow Show by Michael Hartnett, Chief Investment Strategist, BofA Securities:

"Scores on the Doors" YTD returns: crypto leads with a gain of 53.5%, followed by gold at 11.5%, stocks at 8.7%, high-yield bonds at 4.3%, investment grade bonds at 4.2%, and government bonds at 3.3%. Meanwhile, cash has appreciated just 1.4%. On the downside, the US dollar has slipped 2.0%, commodities have fallen 7.8%, and oil has lost 9.6% year-to-date.

Zeitgeist: "The best macro trade right now is no macro trade." This is reflective of the complex and often unpredictable nature of macroeconomic factors on investment decisions.

Biggest Picture: We are reminded of a unique historical context. We would have to go back to the early ‘50s to find a comparable scenario where a low 3.4% unemployment rate coexisted with a low 37% Presidential approval rating. The primary driver behind this disapproval appears to be inflation. It raises questions about the Federal Reserve's decisions, specifically, whether it is a good idea for the Fed to pause when inflation is at 5%. The risk in June may not be the debt ceiling, but rather another month of "rate hike" jobs and inflation data.

Tale of the Tape: presents a snapshot of recent market trends.

The S&P 500 was up 11%, while the Nasdaq grew by 15% in the two months following the Bear Stearns incident in March 2008.
In comparison, the S&P 500 has risen 7%, and the Nasdaq has climbed 10% in the two months after the Silicon Valley Bank event.
Credit and tech led a 10-week rally, which reversed in Q3.
Unlike then, defensives are now outperforming cyclicals, as REITs, banks, energy, and small caps are currently grappling with a potential "hard landing."
A recession might hit credit and tech, as it did in '08, but a negative payroll might be the "buy catalyst" for cyclicals in 2023.

The Price is Right: Some intriguing discrepancies.

The 1-month T-bill yields 5.5%, yet the 2-month T-bill is only at 4.6%.
The 1-year US CDS is at a record high of 177.
While nobody expects the debt ceiling issue to remain unresolved, there's still significant concern in interest rates, as well as a few "break the buck" worries in money market funds.
However, if the political drama ends in a risk-off scenario, the Fed could engage in quantitative easing, as the Bank of England did last October.
This might explain why other asset classes aren't overly worried.

The financial profile of BofA Private Clients reveals a diversely allocated portfolio with $3.1tn assets under management (AUM).

The breakdown is as follows:

59.6% in stocks, 21.6% in bonds, and 11.9% in cash.
Interestingly, there has been consistent equity selling by the Global Wealth and Investment Management (GWIM) for nine weeks.
This has resulted in the lowest stock allocation since September '20.
Conversely, bond allocation is at its highest since October '20.
Private clients have been purchasing discretionary, emerging market debt, low-volatility, and industrial ETFs, while selling REIT, Japan, bank loans, and tech ETFs.

The BofA Bull & Bear Indicator rose to 3.4 from 3.2, marking its highest since March, which can be attributed to increasing fund flows to bonds and emerging market stocks.

Weekly flow trends also offer valuable insight:

Cash received $13.8bn,
bonds saw an influx of $6.3bn,
stocks garnered $2.0bn, and
gold attracted a notable $1.3bn, its largest since April '22.

Flows to Know provides a snapshot of specific investment trends:

Cash: The pace of inflows is slowing, with the 4-week average being the smallest in 10 weeks.
Treasuries: Experienced the largest inflow in 6 weeks at $6.3bn.
High-Yield Bonds: Saw the largest outflow in 6 weeks, at $1.8bn.
Tech: Received the largest inflow since December '21, totaling $3.0bn.
Financials: Suffered the largest outflow since May '22, at $2.1bn.

There are currently three and a half substantial long positions, these being T-bills, investment-grade bonds, big tech, and gold (the "half").

On the other hand, banks and cyclicals are the primary short positions. Further Federal Reserve rate hikes and/or payroll declines are the most probable catalysts that could lead to a reversal in the consensus.