Investors shun stagflation fears with record inflows to US equities

Investors are dismissing the risk of stagflation, sending record flows into US equities, according to Bank of America Corp.

US equity funds got $56 billion in the week through March 13, strategist Michael Hartnett wrote in a note, citing EPFR Global. Technology stocks had the largest inflow among sectors, at $6.8 billion, rebounding from a record outflow. 

That’s happening even as the macro picture is shifting from a Goldilocks scenario to stagflation, Hartnett said. Inflation is higher in developed and emerging markets, while the US labor market is “finally cracking.”

Economic data were mixed in the US this week. Prices paid to US producers topped forecasts in February, underlying consumer prices also rose at a brisk pace last month, and fewer people applied for and received jobless benefits than previously thought.

Hartnett said a “new bout of stagflation means outperformance of gold, commodities, crypto, cash, a big steepening of the yield curve, and a very contrarian equity barbell of resources & defensives.” He notes oil has outperformed the Nasdaq 100 so far this year.

US stocks have gained this year on expectations the economy is largely withstanding tighter monetary policy and that the Federal Reserve will soon cut interest rates. 

For now, equity markets don’t seem bothered by hotter inflation and softer activity data, Barclays Plc strategist Emmanuel Cau wrote in a note. 

“With the Fed so far endorsing current market pricing of three cuts starting in June, investors continue to see the glass half full on the soft landing narrative,” he said. “And there is still a lot of cash to deploy in risk assets if it materializes.”