By Jules Rimmer
Tide of liqudity into U.S. stocks funds reversed this week for the first time since March
If the tide of liquidity that has benefited tech stocks is now receding, then a risk-off summer may be in store.
U.S. stock-market funds suffered $8.5 billion in outflows in the week to Wednesday, the first such exodus of investors since hostilities kicked off with Iran back in March. For Bank of America’s chief equity strategist, this may be a harbinger of a “risk-off summer,” especially if it coincides with a yield-curve inversion and a breakdown in tech stocks.
Published Friday, Flow Show author Michael Hartnett’s weekly strategy note to clients observed that the outflow from U.S. equity funds reversed a huge influx of $119 billion the week previous. It illustrates a deterioration in sentiment, he suggests, that is evidenced by the loss of momentum among the Magnificent Seven MAGS.
MAGS < 60? That might be a “risk-off” signal for the remainder of summer.
The exchange-traded fund backed by this cohort of tech plays is now 14% below its May peak. A drop below the psychologically important $60 level on this vehicle would represent a major shift in the market mindset, Hartnett explains.
The fashion Hartnett identifies is for a swing away from the megacap AI stocks into cyclicals that investors feel may benefit if the Trump White House pivots its focus from foreign affairs to the affordability issues that may play better at the ballot box come midterm election time in November. The sectors set to benefit from the different tack are semiconductors SOX and illiquid cyclicals like small and midcap stocks, housing or real-estate investment trusts.
The weakness shown by safe-haven or dollar DXY debasement plays like gold (GC00), silver (SI00) and bitcoin (BTCUSD) are caused by the presumed end of the Iranian conflict and a jump in the dollar, but Hartnett is keen to emphasize that the decade will more than likely “remain an era of fractured geopolitics and populist politics prioritizing booms over inflation.” Therefore, Hartnett likes gold below $4,000 an ounce and still fancies another weak-dollar beneficiary – emerging markets EEM – as a secular or long-term strategy.
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Secular trade remains long emerging markets vs. U.S. stocks.
Hartnett reckons the dollar is “a rent not an own.” That is, an asset that can be traded for short-term upside but not for the longer term.
-Jules Rimmer
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06-26-26 0851ET
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