(Dec 20): The hawkish pivot by the Federal Reserve combined with uber-bullish sentiment among stock investors has caused risk appetite to be “suddenly twitchy,” according to Bank of America Corp strategist Michael Hartnett.

The S&P 500 is headed for the worst week in more than three months after the US central bank said inflation concerns are back in focus, signaling fewer interest-rate cuts than anticipated next year. Before the Fed meeting, allocations to US equities had surged to a record and cash holdings had fallen so low that they triggered a sell signal for stocks, according to BofA’s monthly fund managers survey published earlier this week.

In a note late Thursday, Hartnett wrote that global equity breadth remains “dire,” meaning a relatively small cohort of the best-performing stocks must “keep winning” to mask any ongoing correction beneath the surface. That’s best illustrated by the S&P 500 Equal Weighted Index, which has dropped more than 7% since a late November record, while the S&P 500 itself fell less than 3% in the same period.

Hartnett said an exchange-traded fund tracking US banking stocks, the SPDR S&P Bank ETF, needs to hold near 2022 highs to prevent investor sentiment from souring ahead of President-elect Donald Trump’s inauguration on Jan. 20. The strategist has previously said investors should start putting more money into stocks outside the US, like China and Europe, before Trump takes office.

The strategist’s warning comes near the end of a strong year for US equities. They’re on track for record inflows in 2024, according to BofA, with the S&P 500 rallying 23% after a gain of a similar size in 2023.

Optimism driven by a resilient American economy, artificial intelligence developments and falling rates has lifted stocks, but there are now doubts about whether the rally can run further after the Fed’s hawkish tone earlier this week.

While bond funds saw their first outflow in 52 weeks at US$6 billion (RM27 billion), investors had been loading up on stocks in the week through Wednesday. Global equity funds drew the biggest inflow ever at almost US$69 billion, with US stock funds also attracting record additions, at US$82 billion, according to EPFR Global data cited by BofA.

There were “abnormally large daily inflows across all S&P 500 funds this Wednesday, possibly related to upcoming Dec 23 quarterly rebalance,” Hartnett said.

The rebalancing of benchmark indexes including the S&P 500 coincides with Friday’s quarterly “triple-witching,” which will see an expiry of US$6.5 trillion worth of options tied to individual stocks, indexes and exchange-traded funds. Share volumes typically spike during the options expiration, which has a reputation for causing sudden price moves as contracts disappear and traders roll over their existing positions or start new ones.

Uploaded by Magessan Varatharaja