Bank of America (BofA) analysts are warning of a collapse in the US jobs market and a possible rise in unemployment next year.
They also recommended selling on a stock market rally ahead of the likely spike in job losses.
“Bears (like us) fear that 2023 unemployment will be as shocking to Main Street consumer sentiment as inflation is in 2022,” said BofA strategists led by Michael Hartnett, who revealed that global equity funds had the largest weekly outflows in three months.
“We’re selling risk rallies from here,” he said, reiterating his preference for bonds over equities in the first half of 2023.
BofA’s Bull & Bear indicator rose to 2.0 from 1.4 in the week ended Nov. 30, suggesting the “buy signal” for risky assets is almost over, analysts said.
“The indicator is at its highest level since May 2022 on more bullish bond inflows, credit engineering, stock breadth and (and) hedge fund positioning,” they said.
The strategists’ outlook is similar to that of their peers at JPMorgan Chase and Goldman Sachs Group, who have also warned of a possible economic recession next year.
Equity funds are starting to see a drain
Global equity funds saw outflows of $14.1 billion in the week ended Nov. 30, led by exits from US stocks, the largest weekly outflow in three months, according to BofA strategists.
They also said $6.1 billion would be withdrawn from exchange-traded funds and $8.1 billion from mutual funds, citing data from EPFR Global.
US equity funds saw outflows totaling $16.2 billion during the period, the highest since April.
They also reported that nearly $2.4 billion exited the global bond market, with cash inflows of $31.1 billion.
US-based large-cap stocks saw outflows of $14.5 billion, with US small-cap stocks, growth and value funds also seeing redemptions.
Long-term optimism among investors about a slowing labor market and signs of an easing interest rate policy from the US Federal Reserve has been overdone, said Harnett’s team.
Labor market remains strong, long-term economic prospects remain poor
The job market looks strong for now, with 263,000 nonfarm-related jobs added in the American workforce, far more than the 200,000 expected, according to a Dec. 2 government report.
Meanwhile, average wages rose 0.6 percent from October, up 5.1 percent from the same period in 2021.
The US unemployment rate remained steady at 3.7 percent.
“Small company jobs are hard to fill (correlated to Fed funds) and peaking in Atlanta Fed wage tracker,” BofA strategists said, “but bulls need wage growth to decline sharply without large job losses.”
The Fed hints at a slowdown in rate hikes in December
Wall Street stocks have rallied since October on expectations that the central bank will tame inflation in time to avoid a wider recession.
Investor sentiment was boosted after Fed Chair Jerome Powell announced on November 30 that the Fed is likely to start slowing the pace of rate hikes at its next meeting in December.
The central bank is expected to cut its next rate hike to 50 basis points after a series of four consecutive hikes of 75 basis points.
However, the strong November jobs report is the last monthly jobs report ahead of the Fed’s December 13-14 two-day meeting.
The news is a sign for some economists that labor demand is still too strong, which could delay a turnaround in central bank policy next year.
The tech-heavy Nasdaq 100 fell 0.1 percent after losing 1.2 percent after the report was released.
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Bryan S. Jung is a New York native and resident with a background in politics and the legal industry. He graduated from Binghamton University.