Bank of America: "Risk of Sell-Off is High"
On Friday, Bank of America's (NYSE: BAC) Chief North American Economist Ethan Harris wrote a note suggesting that the risk of a sell-off in American equity markets is high. He said that the U.S. economy "is in the eye of the storm" and pointed to a number of headwinds. BofA Strategists Arjun Mehra and Cheryl Rowan are also seeing potential trouble ahead. They wrote a note entitled "Code Red," in which they said they see "limited upside from here" and noted that the "risk of a sell-off is high."
Despite the recent stock market strength, the strategists believe that most of it can be attributed to investor expectations for more quantitative easing from the Federal Reserve. They are concerned, however, that the Fed could disappoint the markets, and this would set up conditions ripe for a deep sell-off.
Market participants will be paying particular attention to Ben Bernanke's August 31 speech at the Jackson Hole symposium to get a feel for the likelihood of imminent quantitative easing. Any signs that more QE is not assured, will likely drag the market lower.
The Bank of America strategists also said that macro factors could be a headwind. They noted that they expect for economic growth to disappoint in the second half of 2012 ahead of the fiscal cliff. Furthermore, September is historically the weakest month of the year for stocks. They also pointed to a deepening recession in Europe and slowing growth in emerging markets as concerns.
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