BofA: don’t buy on the first rate hike, expect capitulation

The old stock market adage to buy on the first rate hike and sell on the penultimate rate hike could go wrong this time as inflation is out of control, according to Bank of America Corp.

“Little cracks” were showing up in megacap tech stocks, the epicenter of a 13-year bull market, even before the tightening began, BofA chief investment strategist Michael Hartnett wrote in a note.

He remains bearish until investor positioning “shows a full-blown capitulation” or until a credit event on Wall Street prompts central banks to announce a reversal of the tightening. The Federal Reserve took a restrictive stance this week, saying that it could raise interest rates three times next year, a move that caused volatility in equity markets and prompted investors to sell technology stocks.

A day later, the Bank of England raised rates for the first time since the onset of the pandemic, initiating a cycle of escalation among major central banks. According to Hartnett, inflation always precedes recessions and “it’s like a very high body temperature. high ”that“ must be reduced by tightening or recession to bring the body back to normal and ensure good health in the future. ”The strategists at Barclays Plc have a slightly different opinion. Rate hikes don’t end bull markets, but the central bank’s reduced liquidity translates into less speculative fizz and more volatility, strategists led by Emmanuel Cau wrote.