BofA's Hartnett says sell-off not yet at 'hard landing' levels

The turbulence in global financial markets has yet to reach proportions that would signal worries about a hard economic landing, according to Bank of America Corp.’s Michael Hartnett. 

Even as the S&P 500 Index dropped about 6% since its mid-July record high, the benchmark has held above its 200-day moving average around 5,050 points, while the yield on the US 30-year Treasury note hasn’t fallen below 4%.

“Technical levels that would flip Wall Street’s narrative from soft to hard landing have not been broken,” Hartnett wrote in a note. “Investor feedback is ‘frazzled’,” but expectations of Federal Reserve rate cuts mean that preference for stocks over bonds hasn’t been ended by the market rout, he added.

Global markets have been jolted in the past month as investors have worried that the Fed has been too slow to cut interest rates in time to avert a recession. Still, the S&P 500 rebounded after a report Thursday showed a slower-than-feared cooling in the labor market. The index is now down only 0.5% on the week.

Hartnett — who has taken a more neutral tone on stocks this year after remaining bearish through a rally in 2023 — said the next technical levels to watch would be the 200-day moving averages for the Philadelphia Stock Exchange Semiconductor Index as well as an exchange-traded fund tracking big tech.

They’re currently hovering just above those levels, but a renewed slide would mean the next support for the S&P 500 would kick in at the highs of 2021 — implying a drop of another 10% for the benchmark, the strategist said.

Hartnett also reiterated his view that investors should sell into the Fed’s first rate cut. He expects winners of the artificial intelligence trade to “wallow” in the second half until earnings pick up.

Instead, he highlighted opportunities in assets that were “strangled by 5% yields and can breathe more easily with yields at 3%-4%,” including government bonds, REITs, small-cap stocks and some distressed emerging markets like Brazil.