Bank of America Corp. strategists are sounding the alarm on a potential surge in stock market volatility, attributing it to substantial outflows from US equities and an apparent complacency among both financial markets and policymakers concerning the ascent of Treasury yields. US equity funds have experienced a significant withdrawal, shedding $14.2 billion over the past three weeks, marking the largest exodus since January. This trend is part of a broader global slowdown in stock fund inflows, which have averaged $7 billion per week during the same period, a sharp decline from the $52 billion weekly average recorded in July.
The strategists, including Jared Woodard and Michael Hartnett, highlight a concerning disconnect: markets are not exhibiting the panic typically associated with such financial stress, despite the 30-year Treasury yield reaching its highest point since June 2007 and commodity prices spiking. They describe this situation of "blasé markets" coupled with "bravado policy" as a volatile combination waiting to unfold. This warning comes as oil prices have climbed above $100 per barrel and diesel prices have hit record highs, fueling concerns about sustained inflation and increased pressure on consumers and businesses.
The rising Treasury yields are a key factor, as they escalate borrowing costs for both households and corporations, simultaneously making fixed-income investments more attractive compared to equities. The Federal Reserve's stance on interest rates remains a critical point of uncertainty, with expectations for a rate hike at the upcoming meeting increasing to over 90% following higher-than-anticipated core inflation data. While the S&P 500 recently hit a record high and has remained relatively stable, Bank of America's analysis suggests that this calm may be disrupted by these underlying pressures.
