Don’t Buy the First Rate Hike, Wait for Capitulation, BofA Says

(Bloomberg) — The old stock market adage of “buy the first hike, sell the penultimate rate hike” could go wrong this time as inflation is out of control, according to Bank of America Corp.

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“Little cracks” were appearing in megacap tech stocks, the epicenter of a 13-year bull market, before tightening even began, BofA’s Chief Investment Strategist Michael Hartnett wrote in a note. He remains bearish until investor positioning “shows full-blown capitulation” or a credit event on Wall Street causes central banks to announce a reversal of tightening.

The Federal Reserve turned hawkish this week and said it could raise interest rates thrice next year, a move that sparked volatility in stock markets and prompted investors to sell technology stocks. A day later, the Bank of England raised rates for the first time since the start of the pandemic, commencing a hiking cycle among major central banks.

According to Hartnett, inflation always precedes recessions and “is like a very high body temperature” that “must be reduced via tightening or recession to return the body to normal and ensure future good health.”

Barclays Plc strategists have a slightly different view. Rate hikes don’t end bull markets, but the reduced central-bank liquidity means less speculative froth and more volatility, strategists led by Emmanuel Cau wrote.