- Investors aren't fully buying into the stock market's bullish narrative this year, according to Bank of America.
- That's evidenced by fund flows and a record $5 trillion of cash sitting in US money market funds.
- BofA said the "pain trade" for stocks is still higher, but that investors should fade the S&P 500 at 4,100 to 4,200.
Investors have not fully bought into the stock market's bullish pivot in 2023 after a brutal sell-off last year wiped out trillions of dollars in market value.
That's according to a Friday note from Bank of America, which highlighted the fact that as interest rates remain at multi-year highs, cash held in money market funds has hit a record high of $4.8 trillion.
"Investors acting on attractive level of yields," BofA's Michael Hartnett said. Most money market funds are currently yielding about 4%.
Investors' trepidation towards stocks can also be found in year-to-date fund flows, which have been strong for fixed income and emerging market equities, but weak for US stocks. Investment grade and high-yield debt have seen the strongest inflows since September 2021, averaging $7.7 billion over the past month.
Meanwhile, emerging market debt and equity has seen its strongest inflows since March 2021, averaging $7.1 billion over the past four weeks. Emerging market stocks are one of the best performing areas of the market year-to-date.
While investors pour money into fixed income and international stocks, they're pulling money out of US technology and healthcare stocks, according to BofA, which called the action "capitulation." The outflow trend of the past month from these two sectors is the worst since January of 2019, according to the note.
Another sentiment indicator that shows investors are bearish towards stocks includes the weekly AAII Investor Sentiment Survey. The most recent survey showed bearish respondents at 36.7%, outweighing bullish respondents at just 28.4%.
The reading from AAII represents a continuation of persistently bearish investors that started over a year ago. In fact, 57 of the past 58 weekly surveys showed bearish respondents outweighing bullish respondents, a record since the surveys' start in 1987.
But Hartnett sees good reason for the bearishness, and while he admits the "pain trade" for the stock market remains higher, he recommends investors pull back from the S&P 500 once it reaches the 4,100 to 4,200 range.
"All signals [suggest a] hard landing will occur in 2023; but another tightening of financial conditions this spring may be required to tip a US economy currently growing >7% in nominal terms into the recession the consensus craves," Hartnett said.