As stocks retreat from all-time highs, a senior strategist at Bank of America warned investors to be cautious, citing a series of economic indicators that have historically signaled the end of a rally. Sebastian Raedler, head of European equity strategy at Bank of America, was pessimistic about the outlook, predicting that the S&P 500 could fall a further 1.9% to 5,400 points, and European stocks could fall by about 15%. “If you had a list of when to be bearish, I would say it would be when the market is at an all-time high, risk premiums are at an all-time low, earnings and margins are at their highest levels, and the market is at an all-time high. . The S&P 500 has hit more than 30 all-time highs this year, closing as high as 5,667 last week before falling back. .SPX 5Y Line Raedler also said that the recent increase in unemployment, although starting from a very low level, has This is an “ominous” sign. “Historically, whenever unemployment starts to rise, it never falls again. That’s always the end of the business cycle,” Redler explained. The unemployment rate unexpectedly climbed to 4.1% in June, matching the highest level since October 2021. Since April 2023, the unemployment rate has increased steadily by 70 basis points. The strategist added that such a scenario would typically lead to higher risk premiums and lower asset prices, especially given current higher market levels. “Be careful here,” he advised. The risk premium is the return investors require to hold risky assets such as stocks above the risk-free rate (usually the ten-year U.S. Treasury bond). When risk premiums rise, stock prices typically fall. Raedler also highlighted the rise in initial jobless claims, which are up 15% so far this year, and the decline in hiring intentions among small and medium-sized businesses. The strategist said these factors point to more weakness in the labor market on the horizon. Unemployment rates are generally inversely related to short-term stock market returns. The Bank of America strategist also expressed concern about consumer confidence, calling it “collapsed.” He pointed out that consumer confidence is usually a leading indicator of consumption, and the current level is “consistent with negative consumption growth.” The University of Michigan Consumer Confidence Survey released earlier this month showed that July fell 7.7% from last year and dropped 3.2% from the previous quarter. Bullish View Hani Redha, portfolio manager at Pine Bridge Investments, takes a more optimistic view. Radar warns against calling the stock market rally over prematurely, quoting legendary value investor Peter Lynch: “Investors preparing for a correction or anticipating a correction lose far more money than they lose on the correction itself.” You can read it here Watch the full bull vs. bear debate:
