These are the 6 reasons stocks are ‘divorced from reality,’ according to BofA

Lucas Jackson/Reuters

  • In a note on Thursday, Michael Hartnett, Bank of America’s chief investment strategist, outlined six reasons the stock market has continued to rally amid dismal economic data.
  • One reason could be “fake markets,” Hartnett said.
  • “Government and corporate bond prices have been fixed by central banks … Why would anyone expect stocks to price rationally?” he wrote.
  • While investors are still positioned bearish, Hartnett said policymakers were causing “immoral hazard” forcing investors to buy, banks to lend, and corporate zombies to issue debt this year.
  • Read more on Business Insider.

Since the most recent market lows, Bank of America has been fielding questions about stock performance, such as “Who is going bust?” “When will we retest the lows?” and “Why is the stock market so divorced from reality?”

For the last question, there are six reasons (each bolded below), according to Michael Hartnett, Bank of America’s chief investment strategist.

Economic data has continued to deteriorate — jobless-claims data released this week indicated that in the past nine weeks nearly 39 million Americans have filed for unemployment insurance.

Still, risk assets have rallied. The S&P 500 and the Dow Jones industrial average have each gained more than 30% from March lows, while in early May the Nasdaq erased all losses for 2020.

That could be because of “fake markets,” Hartnett said in a Thursday note. “Government and corporate bond prices have been fixed by central banks … Why would anyone expect stocks to price rationally?” he wrote.

In the past eight weeks, central banks have deployed a total of $4 trillion in asset purchases, Hartnett said, while the global equity market cap has grown by $15 trillion. The pace of the central-bank policy has come out to $2.4 billion in financial asset purchases per hour, a rate that Bank of America expects to fade to $608 million in the coming weeks.

Read more: Michael Gayed’s fund relied on just one market signal to book a huge profit when the coronavirus crushed stocks — and his returns are still soaring. He breaks down his simple approach to crisis investing.

Hartnett said that instead of looking at the $15 trillion market-cap growth, the market rally should be viewed in context of the $30 trillion collapse between February and March. As many as 2,215 out of 3,042 global stocks remain in bear markets, meaning they trade 20% or more below their all-time highs, the note said.

Historically speaking, bear-market rallies in 1929, 1938, and 1974 saw an average rebound of 61% from lows to highs, Hartnett said. That means the S&P 500 should go to 3,180 in this rally — a jump of roughly 8% from where it was trading this week.

Hartnett also said that the current rally is polarized — it’s highly concentrated in growth-focused US technology stocks and “FAAMG” (Facebook, Apple, Amazon, Microsoft, and Google). The total market capitalization of the FAAMG group now exceeds that of the eurozone equity market, the note said.

Bank of America’s current strategy can be described as “structurally bearish” but “tactically bullish,” Hartnett said. He thinks that investors are still positioned bearish, citing the recent Bank of America fund-manager survey finding that roughly 80% expected a U- or W-shaped recovery from the economic crisis and that 70% thought we were still in a bear market.

Still, policymakers are causing “immoral hazard” forcing investors to buy, banks to lend, and corporate zombies to issue debt this year, he said.

Read more: ‘It works for anything I look at’: BlackRock’s bond chief who oversees $2.3 trillion shares the ‘really simple’ 3-part framework that guides every investment decision he makes — and outlines 2 factors he looks for in a company

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