federal reserve: Investors fleeing to cash like it’s 2020 – Blue Barrows

Investors poured the most money into cash since April 2020 on fears of a looming recession, but stocks could see further declines as they don’t fully reflect that risk, say Bank of America Corp strategists.

Even as major benchmarks bounced off last month’s lows, the bank’s report citing EPFR Global data showed cash funds received nearly $89 billion in the week through October 5, while investors withdrew $3.3 billion from global stock funds.

Equities are rebounding this month after slumping in the previous three quarters, fuelled by optimism that weaker-than-expected data will prompt the Federal Reserve to soften its outlook on rate hikes.

The S&P 500 is on track for its best week since end-June, with payrolls data later Friday seen as pivotal to determine the course of policy.

Wall Street is “rebelling against” policy tightening, Bank of America strategists led by Michael Hartnett wrote in the note. And although the rally could keep going in the short term, helped by technical levels, markets are likely to see new lows in October as the spectre of recession pressures corporate earnings, they say.

It’s “so tempting to be contrarian bull” given the rout in bond markets and cheaper US stock valuations, Hartnett wrote, but warned that his base case calls for a “hard landing” in the economy.

Some of his counterparts share the view that stock markets haven’t yet hit a bottom. Credit Suisse Group strategists said this week that earnings faced an “extreme” risk and that stock funds had yet to see “significant” outflows – all implying further declines in the S&P 500. Citigroup strategists led by Hong Li, meanwhile, said US equities had only just started pricing in an economic contraction.

Bank of America’s report also showed that more than $18 billion left bond funds.