- According to Bank of America, Wall Street has yet to reach “full capitulation” as cash remains more hated than stocks.
- It’s an odd dilemma given the sharp decline in equities this year and attractive cash yields.
- “From a risk/reward perspective, the cash profile has improved significantly relative to equities,” BofA said.
The nearly 25% decline in the stock market since the start of the year is still not enough to send Wall Street into complete capitulation mode, according to a Monday note from Bank of America.
The company’s sell-side equity indicator, which tracks shifting allocation recommendations from Wall Street strategists, remains in neutral territory, according to the note. BofA’s Savita Subramanian wants to see the indicator reach “Buy” territory, signaling that most Wall Street strategists are bearish on stocks, before turning more bullish on the market.
This is because the indicator has had a knack for giving contrary signals since its inception.
“We note that Wall Street recommended underweight stocks throughout the bull market of the 1980s and 1990s as well as the bull market of 2009 to 2020,” Subramanian said.
Additionally, the survey-based indicator found that Wall Street strategists still hate cash more than stocks, despite the latter’s steep decline and the former’s higher yields.
The bank pointed out that while Wall Street strategists “have become more cautious about equities since the start of the year,” their recommended stock allocation is just one percentage point below the post average. -Great financial crisis.
Meanwhile, their recommended cash allocation rose just 0.9 percentage points to 3.7% year-to-date, well below the 10.5% level seen in 2006. to 2007, according to the bank.
The big difference between then and now is that the “TINA” trade, or there is no alternative to stocks, has been obliterated by soaring cash yields this year. Most money market funds currently offer yields of just under 3%, while 2-year Treasury bills offer a yield of 4.1%. This is after rates hovered near 0% for more than a decade following the crash of 2008.
“From a risk/reward perspective, the cash profile has improved significantly relative to equities,” BofA’s Savita Subramanian said, while admitting that with inflation still near 40-year highs, equities could offer better protection against rising prices, as they have done in the past. past.
Overall, Wall Street’s still-low allocation to cash, combined with a “Neutral” rating on its contrarian selling indicator, leads the bank to stick to its S&P year-end target. 500 from 3,600. The S&P 500 closed just below that level at 3,585 on Friday.