BofA Strategist Warns: Sell Stocks at First Fed Cut Amid Hard Landing Fears

Michael Hartnett, a strategist at Bank of America, indicated that the risk of a significant recession in the United States is rising, urging investors to sell stocks at the first Fed rate cut. A report from Hartnett’s research team stated that amidst widespread beliefs of a “soft landing” or “no landing,” the risk of a “hard landing” is “elevating significantly.”

Last week, the market was already factoring in a recession, but concerns temporarily eased due to an unexpected rise in the U.S. GDP for Q2. Global stock markets rebounded temporarily, but new disappointing economic data from the U.S. rekindled worries, leading to widespread declines in global equities. The Nasdaq dropped over 2% last night, and its futures fell nearly 2% pre-market. In today's trading, Japan's Nikkei 225 fell nearly 6%, South Korea's KOSPI dropped over 3.6%, and Taiwan’s TWSE tumbled over 4.4%.

On a closer look, yesterday's reports revealed that the July ISM Manufacturing PMI came in at 46.8, the largest contraction in eight months and below the expected 48.8 and prior value of 48.5. Initial jobless claims increased by 14,000 to 249,000 last week, the highest in nearly a year, exceeding the anticipated 236,000. Meanwhile, the number of continuing claims rose to 1.877 million, the highest since November 2021.

Economic indicators such as the ISM Manufacturing and Services PMIs have both declined rapidly, slipping below the growth threshold. This exacerbates fears of a U.S. economic recession, leading the market to bet that the Fed might cut rates in the next three meetings. Consequently, investors have been buying U.S. Treasury bonds, driving the yield on the 10-year note below 4% for the first time since February.

The core concern is whether the U.S. economy will have a “soft landing” or a “hard landing.” Initially, the market narrative was the "Goldilocks scenario," where the economy could manage a rapid fall in inflation while maintaining stable growth. However, with mounting recession fears, earnings growth could falter faster than the drop in discount rates.

Previously, weak economic data and increasing rate cut expectations were seen positively for equities, as they suggested a soft landing was likely. Currently, weak data is now viewed negatively, as it raises the probability of a recession.

Global markets are notably fragile because if the U.S., the leading demand engine, cools down amidst an already weak Chinese and post-rate cut European economy, a global economic slowdown is imminent. Consequently, today's global stock market plunge was more pronounced in markets like the U.S., Japan, Korea, and Taiwan, due to their high valuations and tight connections with the AI industry, with Japanese markets also impacted by rate hikes.

The current market conditions underscore the complexities surrounding the Fed's potential rate cuts, with significant implications if the U.S. economy trends towards a harder landing than previously anticipated. Investors should closely monitor forthcoming economic indicators to gauge the likelihood of strategic shifts by the Fed.