Bank of America Strategist Warns of Potential Sell-Off if Fed Turns Dovish

Bank of America's renowned strategist, Michael Hartnett, has cautioned that if the Federal Reserve adopts a dovish stance during the Jackson Hole Economic Symposium, the U.S. stock market could face a "buy the expectation, sell the fact" scenario. This situation arises when investors purchase stocks in anticipation of positive news, only to sell them once the news is confirmed, resulting in a profit-taking sell-off.

Hartnett's warning comes after the U.S. stock market reached new historical highs this week. He noted that investors are heavily investing in high-risk assets, including stocks, cryptocurrencies, and corporate bonds, betting that the Federal Reserve will lower interest rates to support a weak job market and alleviate U.S. debt pressures.

In his report, Hartnett specifically warned that if Federal Reserve Chairman Jerome Powell signals a dovish stance during the August 21-23 symposium in Wyoming, it could trigger a "buy the expectation, sell the fact" scenario. He reiterated his preference for international stocks over U.S. stocks, a strategy that has been validated by the market this year.

Recent data has shown that the S&P 500 index has reached new highs, driven by strong performances from tech giants and favorable Consumer Price Index (CPI) data. This has led to increased speculation about a potential rate cut in September. Although the Producer Price Index (PPI) data released on Thursday exceeded expectations, reducing some of the speculation, rate swap contracts still indicate a 92% probability of a rate cut in September.

Hartnett has repeatedly warned about the risks of a stock market bubble. He believes that as investors seek inflation-resistant assets and hedge against a weakening dollar, gold, commodities, cryptocurrencies, and emerging market assets will be the biggest beneficiaries.