Bank of America strategist Hartnett: Policy panic will support the market; optimistic about the consumer sector

Investing.com - Michael Hartnett of Bank of America stated in a report that the S&P 500 index dropping below 6,600 points is “triggering policy panic,” but current signals do not yet indicate capitulation by bulls or broader macro panic signs.

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Hartnett expects the policy backdrop to evolve into broader support for the market. “We assume that policy panic will avoid an economic recession,” he wrote, suggesting to go long on steepening yield curve trades and consumer stocks as preferred trades.

In the stock sector, Hartnett emphasized that the consumer discretionary sector presents a key opportunity, noting that the sector’s relative valuation is at low levels similar to those seen during past crises like 2008 and 2020. He described this trade as his “favorite contrarian long,” particularly among low-income groups, which relates to the anticipated post-war policy shift aimed at addressing affordability pressures and low approval ratings.

Hartnett believes investors should remain patient, stating “no haste, no greed,” while also suggesting that as the dollar weakens and fiscal expansion outside the U.S. increases, gold and international stocks may regain leadership.

More broadly, the strategist noted that the market remains caught between competing “pain trades,” with the next major move either led by private credit reaching new highs or a deeper decline driven by semiconductors. He stated that current indicators have not shown the kind of capitulation or macro deterioration usually associated with lasting market lows.

Hartnett also pointed out that the macro landscape is shifting, with the market transitioning from liquidity and AI-driven optimism by late 2025 to a stagflation dynamic, potentially leading to recession conditions in 2026.

Flow data shows that investors have shifted to a more defensive stance in the past week. According to Bank of America statistics, bond funds were the only major asset class to see inflows, attracting $2.7 billion, while equity funds recorded outflows of $29 billion.

U.S. stocks led declines, with outflows of $23.6 billion, the largest in 13 weeks, while European stocks saw outflows of $3.1 billion, the largest since April. The materials sector funds recorded a record redemption of $10.5 billion.

Additionally, money market funds experienced outflows of $35 billion, marking the first and largest withdrawal in 10 weeks, while gold funds saw a loss of $6.3 billion, the largest outflow since October. Cryptocurrency funds also saw an outflow of $500 million.

In fixed income, demand focused on shorter-duration assets. Short-term bonds attracted $13.3 billion, the third-largest inflow on record, while long-term bonds saw outflows of $4.7 billion, the second-largest outflow ever and the largest since March 2020. High-yield bonds continued to bleed, with outflows reaching $13.5 billion over three weeks.

Regionally, emerging market stocks saw a return to inflows, increasing by $700 million, while Japan continued its inflow momentum, seeing $400 million for the seventh consecutive week.

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