BofA Flow Show: BBQ sauce

July 3, 2023

4 minute read

In Michael Hartnett's update titled "BBQ sauce" published June 30, 2023, here are the key points explained:

The US unemployment rate fell to 3.4% in April 2023, marking its lowest level since 1969, compared to the historic low of 0.7% in April 1929.
China's youth unemployment reached an unprecedented 20.8% in May 2023.
The US ran a budget deficit of $2.1 trillion over the past 12 months, representing 8% of its GDP. This is the largest deficit for the country in the last 60 years outside of periods of war or recession.
If the US government's proposed 2024 Federal budget of $6.9 trillion is approved, it would make it the third-largest economy globally.
Central banks worldwide have raised interest rates 89 times year-to-date (YTD) in 2023, a significant drop from 292 times in 2022.
Spain became the first economy to bring headline inflation back down to 2%, although the core inflation remains at 6%.
The UK experienced a significant 20% food price inflation.
The average annual rent for a one-bedroom apartment in Manhattan has risen to $57,200.
The Bank of Japan has bought $1.1 trillion of Japanese government bonds over the past 12 months, equivalent to 24% of Japan's GDP.
US spending on construction for manufacturing, often referred to as reshoring, has doubled over the past year to $189 billion.
The Mexican peso has appreciated by 26% against the Japanese yen in the first half of 2023.
Commodities have had the worst performance of all assets in the first half of 2023, with a decline of 8.4%. Interestingly, commodities were the best-performing assets in 2021 and 2022.
The US Strategic Petroleum Reserve fell to its lowest since August 1983 at 349 million barrels, compared to 582 million barrels pre-war.
There has been a YTD inflow of $750 billion to money market funds, with assets under management now totaling $7.8 trillion.
US banks experienced a YTD outflow of $578 billion from deposits.
Excluding the top 28 names, the S&P 500 index returns would be negative YTD.
The market capitalization of the Big Tech 7 has increased by $4.1 trillion YTD, surpassing Germany's entire GDP.
The combined market cap of Apple, Microsoft, and Google has reached $7.0 trillion, exceeding the market cap of all Emerging Markets, which represent over 6.5 billion people.
US corporate bankruptcies numbered 236 between January to April 2023, a doubling compared to the same period the previous year.
2024 will see key elections in Taiwan on January 13th, Russia on March 17th, the European Union on June 6th, and the United States on November 5th.

In terms of asset performance YTD, crypto has risen by 52.9%, stocks by 12.8%, high yield (HY) bonds by 5.1%, investment-grade (IG) bonds by 3.7%, and gold by 4.7%. Government bonds have shown a slight gain of 0.8%, while cash has increased by 2.2%. On the other hand, commodities and oil have seen declines, with the US dollar also showing a minor decrease of 0.6%.

The winners so far include US Big Tech's "Magnificent Seven," semi-conductors, home builders, the Nikkei index, European luxury brands, and the Mexican peso.

The losers include US regional banks, oil, European real estate investment trusts (REITs), and Chinese high-yield bonds.

The weekly investment flows were quite mixed, with $1.5 billion flowing into equities and $0.6 billion into bonds. However, gold saw an outflow of $1.5 billion and a substantial $33.6 billion was withdrawn from cash. Some specific highlights include:

The US Treasury saw 20 straight weeks of inflows, totaling $1.6 billion. This represents the longest streak since September 2011.
Commodities experienced the 7th consecutive week of outflows, amounting to $1.7 billion.
Over the last four weeks, Japan has seen $7.9 billion inflows, marking the highest 4-week inflow since April 2020.

Looking at the year-to-date flows:

Winners are cash ($752 billion inflow), investment-grade bonds ($113 billion inflow), and emerging market equities ($67 billion inflow).
Losers include US stocks (with a $38 billion outflow), European stocks (a $27 billion outflow), Treasury Inflation-Protected Securities (TIPS, with a $17 billion outflow), bank loans (an $11 billion outflow), and high-yield bonds (a $7 billion outflow).

Bank of America's private clients, managing assets worth $3.2 trillion, hold 60.1% of their portfolio in stocks, 21.5% in bonds, and 11.7% in cash. They've been moving funds out of stocks for 24 weeks now and investing more in bonds. In terms of sector preferences, these clients are buying Japanese stocks, real estate investment trusts (REITs), and master limited partnerships (MLPs), while selling TIPS, bank loans, and municipal bond ETFs.

Finally, the Bank of America Bull & Bear Indicator dropped slightly from 3.4 to 3.2 in the last week, reflecting slowing corporate bond inflows and deteriorating equity market breadth.

Make sure to have a look at the accompanying chartbook presented to back these points and outlook.

by Michael Hartnett, Chief Investment Strategist, BofA Securities