Investors Are Spooked

Image source: Dennis W Donohue, alberto clemares exposito - Shutterstock

What's going on?

Data out from the Bank of America (BoA) on Friday showed that investors are fleeing US stock markets.

What does this mean?

The US has vehemently denied it’s in a recession, but the facts speak for themselves: the country already entered a “technical recession” – when an economy shrinks for two quarters in a row – last quarter. Looks like investors are choosing fact over fiction: BoA said the current mood in stock market circles is “appalling”, with investors scared off by rampant inflation, mounting interest rates, and the prospect of a long slowdown. That probably explains why investors pulled nearly $11 billion out of US stock funds in the first week of September, close to the $15 billion lost by global equity funds in the same period (tweet this). That’s the biggest mass exodus for nearly three months, and it certainly wasn’t helped by the almost $2 billion that was snatched out of particularly interest rate-sensitive tech stocks.

Why should I care?

For markets: Hope for the best, brace for the worst.
Deutsche Bank’s settled on two likely outcomes for this whole debacle. The best-case scenario sees inflation slowing down, the market floating back to its previous highs, and the S&P 500 bouncing back 20% before the year’s end. But then there’s the worst case: if the US does fall into an official recession then investors are likely to really bow out, which could send the S&P 500 down by a shudder-inducing 25%.

For you personally: Is this… a good thing?
BoA’s tailor-made “bull and bear indicator” is flashing all the way bearish right now, meaning investors are essentially the most pessimistic toward the stock market as they could be. And while that sure sounds like a bad sign, professional investors have historically seen these signals as “contrarian indicators” that could hint at an incoming rally. So in essence, all this bad news could be a blessing in disguise for you savvy bargain-seeking investors out there.

Originally posted as part of the Finimize daily email.

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