Financial markets have reached a critical juncture with positioning across asset classes as bearish as at any time seen since August 2002, July 2008, 11 September, September 2015, January 2016 and March 2020, but opportunity might be about to knock on investors’ door, said strategists at Bank of America.
In several of those instance, three-month returns after BofA’s Bull & Bear indicator had hit zero, as it over the preceding week, had been “strong”, BofA’s Michael Hartnett and Myung-Jee Jung said in a research report sent to clients.
However, in 2002 such returns did not materialise as the US registered a rare ‘double-dip’ recession, nor in 2008/2011 which saw a ‘systemic event’.
They also noted that while credit and crypto had seen a so-called ‘capitulation’ – that was not the case for stocks.
Similarly, despite markets being “painfully oversold”, until the interest rate shock could certify that the inflation shock was over, “rallies will likely be sold”, Hartnett and Jung added.
Looking ahead, they expected the back half of 2022 to see a recession shock and a crash which in their words was “not quite done yet”, but “once all done and dusted in H2, opportunity knocks”.
Among the opportunities that they spied for the second half for the 2023 bulls were small cap stocks and real assets (inflation), Emerging Markets due to US dollar debasement, Industrials (Infrastructure), and the Asian consumer.
They also expected long duration bonds to benefit from a top in the US dollar, which they also expected would happen in the back half of 2022.
The best strategy for that scenario? The humiliated ’60-40′ strategy, they said.