BofA Strategists Warn of Stock Volatility as Outflows Hit US

(Bloomberg) -- Outflows from US stocks are setting the stage for higher volatility as markets and policy makers remain complacent about rising Treasury yields, according to Bank of America Corp. strategists.

US equity funds shed $14.2 billion over the past three weeks, the largest outflow since January, BofA said, citing EPFR Global data. Inflows are slowing worldwide, with global stock funds averaging $7 billion a week over the same period, down from $52 billion in July.

That's a sign investors are becoming more cautious. Still, there's no indication of panic, with the Federal Reserve still debating a data-dependent interest-rate hike even with oil above $100 per barrel and diesel prices at records.

"Markets stop panicking when policymakers start panicking, but no panic anywhere despite the highest 30-year yield since June 2007 and spiking commodities," said strategists including Jared Woodard and Michael Hartnett. "Blasé markets" and "bravado policy" are "a recipe for volatility," they wrote.

Since making a record high about a month a ago, the S&P 500 has been stuck in a tight range, while volatility has crept up but remains contained. Uncertainty about the monetary policy and US midterms elections, the lack of a resolution to the war in Iran, as well as worries about artificial intelligence spending are moving some investors to the sidelines.

The BofA team warned that despite $1.5 trillion spent on AI in the past three years, there is little evidence yet of economy-wide productivity gains. In fact, total factor productivity is falling below trend, a measure highly correlated with consumer confidence over the past 50 years.

"Sometimes Main Street knows what Wall Street doesn't," they said.