Brace yourself for a 10% drop in stocks, driven by the 3 ‘Rs, warns Bank of America

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Bank of America sounded alarms about the stock on Friday, as it warned of a correction looming. “The 3Rs of rates, regulation, redistribution are the historical catalysts that end bull markets and bubbles … we say all the events of ’21, not ’22, and they all signify the next lower quarters / years / volatile, “said Michael Hartnett, the bank’s chief investment strategist, in the Flow Show note to clients.

He said investors may be facing higher inflation in the second quarter, and while the Federal Reserve may become more dovish at its March, April and June meetings, there are headwinds. That change would coincide with gross domestic product growth of 5%, earnings growth of more than 20%, inflation of around 3% and “visible signs of excess speculation on Wall Street,” he said. On the regulatory side, Hartnett said investors should take note of the tightening of liquidity from China’s central bank this week. China is “clearly playing the ‘adult in the room’ role willing to curb speculative activity in the role reversal of 10 years ago.” But once China’s tightening begins to coincide with the decline in banking stocks in the country, fears about the tightening of liquidity will spread, he said.

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The bank saw strong flows into equities in the past 12 weeks, with a record $ 272 billion in equities, the third largest inflow to debt and emerging market equities of $ 90 billion, the second largest inflow to companies from small cap of $ 28 billion. . The S&P 500 is up just 0.8% so far this year, but 14% in the last three months. The index gained 16% in 2020. Read: Invesco Small Cap ETFs Rebound After Wednesday’s Small Contraction

What else could the bull break? “Fresh forced sale of QE [quantitative easing]- Bull market leadership in high quality technology and GI [investment grade] the bonds would be [a] more sinister development ”, said Read: GameStop and AMC drama does not stop with the stock market He noted that 52% of all government bonds that yielded less than 2% 10 years ago now yield 12%, while Investment grade corporate bonds bonds that yielded less than 2% are now at 31%, in that same time period. It’s no wonder, he said, that high-yield bond issuance is on the rise in 2021.

Hartnett and the bank also weighed in on the standoff between short selling hedge funds and retail investors organizing through Reddit’s WallStreetBets and other forums, calling it “another escalation” in the war for equality. That has sparked wild action for stocks with short positions, such as video game retailer GameStop GME, -44.29% and theater chain AMC Entertainment AMC, -56.63%. Read: Don’t be a pig: advice for both sides of the GameStop saga when Robinhood reopens the tap He said the bank’s “secular view is that inequality can only end with higher wage inflation for the poor and taxes on wealth for the rich “, as the regulation pointed out, only in the new investors will an” angry “bull market remain.