Depth of economic recession and geopolitical risks are key for 2H outlook, BofA says
Bank of America strategists' contrarian stock market timing models continued to flash 'buy' across the latest week, but risks were not absent.
In terms of the 'big picture', strategists Michael Hartnett and Myung-Jee Jung said financial markets had moved out of the "inflation shock" phase and were now immersed in a "rates shock" and "recession shock".
The depth of the recession given the recent "credit shock" and geopolitical risks were the key factors to monitor when trying to anticipate the direction that financial assets' prices would take in the back half of 2022, they said.
Significantly, a week ago they cautioned that big returns tended to follow over the course of the three months after those models gave off buy signals, that is unless "2 standard deviation" events occurred.
Such rare events included the double-dip recession of 2002 and the systemic event that was August 2011, they said in a research report published on 23 June.
Now however, they pointed out another four such events, including the collapse of WorldCom in July 2002, that of Lehman Brothers in September 2008, the downgrading of the US sovereign debt rating in August 2011 and China's currency devaluation four years later.
Thus, all in all, in 12 of the 19 occasions since 2002 on which those contrarian indicators had signalled a buying opportunity - not including the present one - stocks had delivered strong returns, they pointed out.