"Ain't nothing more dangerous than a bear at the end of a bear market," Bank of America investment strategist Michael Hartnett said about the stock market in his latest "The Flow Show" report.
The analyst stated the stock market will attempt new lows over the next three to six months amid a confluence of factors, including history, policy and recession.
History says “sell the last rate hike” in an inflationary environment, as this was the correct stock market strategy during the inflationary 1970s and 1980s.
Contrary to what happened during disinflationary periods, the average Dow Jones returns after the last Fed hike in the '70s and the '80s were negative by 4.5% over the next three months and negative by 6.6% over the next six months.
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The Stock Market Is Not Fearful Enough Of Recession
“Surge in emergency Fed discount window borrowing has historically occurred around big stock market low,” Hartnett noted.
According to the analyst, when banks utilize the emergency discount window to borrow from the Fed, this leads to stricter lending requirements at banks and credit crunch later, which leads to a collapse in small business optimism. As small firms provide two-thirds of all employment in the U.S., thus the labor market comes crashing down.
In addition, investor worries over the lack of policy coordination between the Fed and the Treasury Department to ban runs may further worsen the bearish sentiment on equities.
Scores On The Door: DIA vs SPY
The SPDR Dow Jones Industrial Average ETF Trust DIA and the SPDR S&P 500 ETF Trust SPY are currently down 13% and 18%, respectively, since their highs hit at the end of 2021.
The two equities ETFs increased nearly 10% during the current bear market rally, which began in mid-October 2022, but momentum recently shifted to the bearish side again in the last month, with SPY dropping 2% and DIA losing 3%.
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