BofA's Hartnett Says Investors Need Sustained Fed Cuts to Deploy Cash
Yahoo Finance ·
According to Bank of America strategists led by Michael Hartnett, institutional and retail capital will remain on the sidelines until the Federal Reserve initiates sustained monetary easing. Money market fund assets have surged from $5 trillion in 2023 to $8 trillion, currently generating $330 billion in annual interest income with Treasury bills yielding 4.2%. For the week ending October 7, money market funds attracted $166.4 billion, bonds drew $33.8 billion, equities gained $12.4 billion, and gold added $2 billion, while crypto funds suffered $600 million in outflows. The BofA Bull & Bear Indicator dropped from 8.8 to 8.1, staying firmly in sell territory amid weaker market breadth and wider credit spreads. Strategists highlight that upcoming midterms remain a primary catalyst for a potential 10% swing in equities moving toward 2027, advising investors to maintain defensive stances while favoring commodities, gold, and emerging markets.
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According to Bank of America strategists, money market fund assets have surged to $8 trillion, generating $330 billion in annual interest income, meaning cash is unlikely to enter the market until sustained Fed rate cuts occur. Risk aversion dominates, with 50 percent of global equities trading below their moving averages. Investors need to maintain a defensive portfolio until the Fed's monetary policy pivots and the midterm elections pass.
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- Bonds — Treasury yields are at 4.2 percent, and funds are likely to flow into peak yield investment destinations such as 30-year Treasuries.
- Commodities — BofA strategists have suggested a strategy to maintain long positions in gold and commodities amid the macro environment.
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- Equities — Fifty percent of global stocks are below their moving averages, and sideline cash will not flow into equities until Fed rate cuts happen, limiting upside.
- Financials — Recent weekly data showed the financial sector recorded $3 billion in outflows, taking the biggest hit since March.
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The weekly inflow of $166.4 billion into money market funds, the largest since April 2020, demonstrates that a preference for safe-haven assets has been maximized amid a high-interest-rate environment. According to BofA's analysis, massive sideline cash is unlikely to move into risk assets without actual Fed rate cuts.
The bullish scenario is that aggressive Fed rate cuts drive $8 trillion in cash into the stock and bond markets, while the bearish scenario is that prolonged tightening increases downward pressure on the stock market. Key indicators to watch are U.S. Treasury yields, MMF fund flow trends, and the percentage of global stocks reaching their 50-day and 200-day dual moving averages.
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