Bank of America (BofA) analysts are warning of a collapse in the US labor market and a potential rise in unemployment next year.
They also recommended selling the stock market rally ahead of a likely increase in job losses.
“Bears (like us) worry that unemployment in 2023 will be as shocking to high street consumer sentiment as inflation in 2022,” said BofA strategists led by Michael Hartnett, who found that global equity funds had the biggest weekly outflows in the last three months.
“From here we are selling risk premiums,” he said, reiterating his preference for bonds over stocks in the first half of 2023.
BofA’s Bull & Bear indicator rose to 2.0 from 1.4 in the week to Nov. 30, indicating the “buy signal” for risk assets is almost over, according to analysts.
“The indicator was the highest since May 2022 when it comes to higher bond inflows, credit engineering, capital breadth, (and) hedge fund positioning,” they said.
Strategists’ outlook is similar to that of JPMorgan Chase and Goldman Sachs Group, which have also warned of a potential economic recession next year.
Equity funds are starting to see outflows
Global equity funds saw outflows of $14.1 billion in the week to Nov. 30, led by outflows from U.S. stocks, the biggest weekly outflow in three months, according to BofA strategists.
They also said $6.1 billion was being withdrawn from exchange-traded funds and $8.1 billion from mutual funds, citing data from EPFR Global.
In that period, American equity funds realized a total of 16.2 billion dollars in outflows, the most since April.
They also reported that nearly $2.4 billion left the global bond market, with cash inflows of $31.1 billion.
US-based large-cap stocks saw outflows of $14.5 billion, with small-cap stocks, growth and value funds also seeing redemptions.
Investors’ long-term optimism about a cooling labor market and signs of easing interest rate policy from the Federal Reserve is overblown, Harnett’s team said.
The labor market remains strong, the long-term economic outlook remains weak
The labor market still looks strong for now, as 263,000 nonfarm jobs were added to the US labor force in November, 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 unemployment rate in the US remained stable at 3.7 percent.
“Hard-filling small business jobs (correlated with Fed funds) and a peak at the Atlanta Fed to track wages,” BofA strategists said, “but bulls need wage growth to decline sharply without big job losses.”
The Fed hints at a slowdown in interest rate hikes in December
Wall Street stocks have seen a rebound since October on expectations that the central bank will tame inflation in time to avoid a major recession.
Investor morale received a boost after Fed Chairman Jerome Powell announced on November 30 that the Fed is likely to begin 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 run of four consecutive 75 basis point hikes.
However, the strong November jobs report is the last monthly jobs report before the Fed’s two-day meeting on 13-14.
The news is a sign to some economists that demand for labor remains 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 on news of the report.
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Brian S. Jung is a native and resident of New York with experience in politics and the legal industry. He graduated from Binghamton University.
