Here are the key takeaways from Michael Hartnett's latest Flow Show:
• Lows on corporate bonds & stocks to hold on extreme bearishness & policy stimulus.
• Policy ended credit crunch but not yet recession...US dollar, oil, HY bonds will signals worst of recession priced-in.
• Big EPS headwinds: bias asset allocation toward growth, yield, quality alongside stagflation hedges (gold & small cap).
And before we get into the meat of Hartnett's latest weekly must read, a quick reminder that it's one of those years where gold is the top performing assets: gold 3.6%, US dollar 3.4%, government bonds 3.0%, cash 0.5%, IG bonds -5.7%, HY bonds -14.9%, global equities -24.2%, commodities -41.6% YTD.
With that in mind, here are the key themes of the current week:
• March capitulation: historic $284bn out of bonds and $658bn into cash in past 4 weeks ($64bn out of equities = sideshow).
• Bond capitulation: record month of redemptions from IG bonds ($156bn), EM debt ($47bn), Municipal bonds ($24bn), HY bonds ($23bn).
• Tech indestructible: $4bn inflows to technology funds in March & inflows throughout 2020 (Chart 3); IG bonds = "glue" holding Wall St together, but tech "glue" for stocks (Nasdaq currently defending v imp asset allocation resistance level vs. T-bills - Chart 2).
• Weekly flows: record $194.2bn into cash (Chart 3), $8.1bn into equities (largest in 7 weeks), $3.2bn into gold (2nd largest inflow ever), $27.1bn out of bonds; notable weekly flows…record inflows to HY bond ($6.9bn), big redemption week in government bonds ($4.3bn - Chart 9), tech inflows ($1.5bn - Chart 10).
• Most important flow to know: March 11th-18th crash centered on Commercial Paper market & redemptions from Prime MMFs; Fed stepped in as buyer of last resort to end short-term funding panic; $148bn outflows from Prime MMFs past 3 wks but Fed CP buying program has ended systemic panic & outflows stabilizing (Chart 4).
• BofA Bull & Bear Indicator: cross-asset measure of positioning pinned at 0.0 (Chart 1), i.e. investors are extremely bearish which always leads to big bounce except when "Ghost in the Machine", e.g. Lehman in 9/08; since BofA Bull & Bear Indicator "buy signal" 3/17 SPX (2386) +5.9%, ACWI +5.2% following staggering losses.
• Brave New World: Q2'2020 begins with investors nursing $20tn loss in global equity market cap, Main Street in midst of $4.4tn H1 annualized forecasted loss in US & Eurozone GDP (Chart 5) & 10 million Americans unemployed in past 2 weeks, $12tn in announced global monetary & fiscal stimulus ($7tn QE + $5tn fiscal), and Money Market Funds holding a record $5.5tn in AUM.
Which brings us to Hartnett's summary of "Good, Bad, What to Do:" Tough for asset prices & volatility to subside until human beings can safely leave their homes; that said here's why BofA believes that lows on corporate bond & stock prices are in:
• Magnitude of crash stocks (>$20tn in market cap) & credit (IG credit spreads 100bps to 400bps) means bulk of selling behind us.
• New lows require 1929 or 2009 redux; 2020 monetary/fiscal bazooka launched much quicker than in 2008, and Fed credit programs have short-circuited credit event; re 1929 monetary, budget, trade, policies completely different, no Gold Standard, there is FDIC insurance…; extreme bearishness (see BofA Bull & Bear Indicator) + policy stimulus (+ IMF $1tn war-chest for EM, more US/EU/China fiscal stimulus to come) investors buy SPX 2150-2350 range.
• Second wave virus & credit event can induce fresh Treasury buying but note "safe haven" Treasury yield significantly lower today than in 6 big crashes of past 100 years (Chart 6).
• EPS in collapse but SPX 2150 low justified via -25% drop in EPS to $120 and a policy-success PE of 17.5 (Chart 8 ).
• And April v likely to be "peak negativity" for COVID-19 and economy; note "mutually-assured destruction" of Saudi/Russia/US oil policy may be coming to end.
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