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A further stock rally will be ‘like bathing in lava’ for market bears, BofA says

Investors betting against the stock market have taken their lumps in 2023 and could be in for more trouble ahead, according to Bank of America. The S & P 500 has risen about 5.5% in just the first four weeks of the new year as investors have grown more confident that Federal Reserve efforts to slow the economy are nearing an end. That’s been a headache for those short the market following a year in which stocks fell sharply amid recession fears and tightening from the Fed. In his weekly note examining the flow of money through financial markets, Bank of America chief investment strategist Michael Hartnett noted how tough it’s been for the bears. “Another 3-5% [gain] here will feel like bathing in lava if you’re a bear,” Hartnett wrote in the “Heard on the Street” section of his “Flow Show” report. Hartnett further noted that the “pain trade,” that has inflicted damage on those betting against stocks has been higher, and he’s watching the 4,100 to 4,200 level on the S & P 500. That represents a range of 10%-34% in gains from Thursday’s close. “After that we sell as we [are] now close to moment where stock gains start dragging yields higher,” Hartnett wrote. Elsewhere in the note, he cites some interesting trends that investors have had to face in recent days. Bonds, for instance, have provided the best of both worlds for investors, with yields high enough for holders to clip coupons, while the trend of declining yields also is providing capital appreciation for those trading fixed income. Bond yields move opposite price. However, Hartnett noted that the current trend may not last. With inflation softening but still well above the Fed’s 2% target and the jobs market still around its tightest levels in history, interest rates could rise more than the market anticipates and change the current dynamic. “All signals hard landing will occur in ’23,” Hartnett wrote, “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.” Real GDP rose at a 2.9% annualized pace in the fourth quarter, but current-dollar growth jumped 6.5% and averaged 7.3% over the past year. Markets expect the Fed to raise interest rates twice more, in quarter-point increments at its meeting next week and then in March. The expectation is then that the central bank will cut before the end of the year, though multiple officials have said they don’t see any policy loosening happening in 2023. BofA economists expect a likely mild recession to hit in mid-2023.

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