(Bloomberg) -- The slump in US stocks is likely to prompt policy intervention from President Donald Trump as well as the Federal Reserve, Bank of America Corp.’s Michael Hartnett said.
The strategist recommended buying the S&P 500 Index at 5,300 points, a drop of another 4% from Thursday’s close. He said that level would indicate the selloff is over if it’s accompanied by more stock outflows, a surge in fund managers’ cash levels to above 4% of assets under management, and a widening in US high-yield corporate spreads to 400 basis points.
Global stock funds recorded about $2.8 billion in outflows in the week through March 12, the biggest redemption this year, according to the note from BofA citing EPFR Global. That still only represents a small portion of the $156 billion in inflows so far this year, Hartnett said.
“We say this is a correction, not a bear market in US stocks,” the strategist wrote. “Since equity bear threatens recession, fresh declines in stock prices will provoke flip in trade and monetary policy.” Even so, he reiterated his preference for international equities over the US this year.
The S&P 500 has plunged 10% into correction territory since a February peak on worries that Trump’s policies will tip the economy into recession as he threatens a global trade war. The technology-heavy Nasdaq 100 has dropped 13% on fears around lofty valuations. A bear market is defined as a 20% drop from a recent high.
In the credit market, the spread of the Bloomberg US Corporate High-Yield Bond Index widened by over 12 basis points to 334.9 basis points on Thursday, the biggest gap over risk-free rates since August.
With inflation showing signs of easing, all eyes are on the Fed’s policy decision next week, although swaps traders aren’t currently pricing in another rate reduction until June. Meanwhile, Trump has so far indicated he’s willing to tolerate a weaker economy as he threatens tariffs in support of his America-First agenda.
--With assistance from Michael Msika and Esteban Duarte.
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