The Tell: ‘We’re in technical recession, but just don’t realize it’: Bank of America sees more ‘shocks’ to come

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The shocks aren’t over, get ready

That was some timely advice from Bank of America on Friday, hours before worse-than-expected U.S. inflation data knocked the wind out of Wall Street and left investors bracing for more aggressive central bank action.

Data showed the cost of living surged 1% in May amid higher rents, gas and food prices, keeping the rate of U.S. inflation at a 40-year high. Annual inflation now sits at 8.6%, up from 8.3% and a new cycle high and most rapid increase since 1981. The S&P 500 index
SPX,
-2.45%

tumbled 2% on Friday.

Taking a fresh look at the so-called bear market rally in U.S. stocks that took hold in late May was a team at Bank of America, led by Michael Hartnett, the chief investment strategist. The bank’s own bull and bear indicator- is now deep in “contrarian bullish” territory — with credit also looking “deeply oversold,” he noted.

BofA Global Investment Strategy

So why do investors keep selling those rips? The inflation shock isn’t over, as driven home by Friday’s data, an interest rates shock is just starting, an economic growth shock is looming and there is “no release valve from a peak in yields,” while the bear market rally itself is “too consensus,” he adds.

He rattled off a number of such spikes in prices since the start of the year — a 141% surge in natural-gas prices, gasoline up 91%, wheat 39%, soybean 33% and corn and cotton up 30%.

BofA Global Investment Strategy, Bloomberg

“We’re in technical recession, but just don’t realize it,” said Hartnett, who notes ever murkier consumer data, household and consumer balance sheets indicating a shallow recession ahead. He adds that “what can turn shallow into deep is the great unknown of the shadow banking system.”

And of course, stagflation is also a risk, one that’s incompatible with “goldilocks” S&P 500 price/earnings ratio of 20 times for the past 20 years, when it should be nearer to 15 times, he said.

And panicky investors may be getting more whiffs of reality, with the bank noting $54.2 billion flowed to cash in their latest weekly data, the biggest in six weeks. Just $12 billion went to equities.

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