(Bloomberg) — Cash is king, with investors fleeing to the safety of cash funds at the fastest pace since the coronavirus pandemic as the Federal Reserve remains firmly hawkish, according to strategists at Bank of America Corp.
The asset class had inflows of $62.1 billion in the week through Nov. 2, according to a note from the bank citing EPFR Global data. That’s contributed to $194 billion of inflows into cash from the start of October — the fastest start to a quarter since the pandemic roiled markets in the second quarter of 2020.
Bank of America’s strategists don’t expect the Fed to pivot anytime soon as inflation remains high and unemployment is low. “Lesson is job losses catalyst for 2023 pivot,” strategists led by Michael Hartnett wrote in the Nov. 4 note.
A recession and credit events will need to occur for the Fed to end tightening, prompting the start of a new bull market, Hartnett said. Traders will be closely watching jobs data due later today for signs of any slowing in the labor market, which could convince the central bank to soften its stance.
Hartnett’s comments come after Fed Chair Jerome Powell indicated this week that he’s prepared to push interest rates as high as needed to stamp out inflation, even as the central bank eyes a downshift to a slower pace of increases. The Nasdaq 100 closed at the lowest level since July 2020 on Thursday, with the gauge on track for its worst week since January. The S&P 500 is set for its worst week since September.
Among other asset classes, global equity funds saw $6.3 billion of inflows in the week, while nearly $4 billion was pulled from bonds, according to the EPFR data.
Equities are likely to bottom in the spring of next year due to a “recession shock,” the strategists wrote. After inflation, rates and the dollar peak, investors should sell the greenback and buy 30-year Treasuries, high-yield bonds, emerging-market assets and small caps, they said.
Bank of America’s custom bull-and-bear indicator remained at its “extreme bearish” level for a seventh consecutive week, the longest period since the global financial crisis in 2008-2009. The maximum bearish level is often regarded as a contrarian buy signal.
Among other upcoming catalysts, Americans head to the polls on Tuesday for midterm elections to decide control of both chambers of Congress, the governorship in 36 states, and countless other local races and ballot initiatives. Democrats risk losing their House majority to Republicans but are seeking to keep their narrow hold on the Senate.
A Republican win would mean tighter monetary policy and further yield curve inversion, Hartnett said. A Democrat win would translate into looser fiscal policy and a steeper yield curve, he said.
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