Q2 Will Be a 'Pain Trade', Bonds to Outperform Stocks; Buy US Defensives - BofA

April 23, 2021 8:34 AM EDT

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A "pain trade" is defined as "tendency of markets to deliver the maximum amount of punishment to the most investors from time to time." This market phenomenon is coming to markets in Q2, says BofA Chief Investment Strategist Michael Hartnett.

A "pain trade" will be driven by the bond market, which is set to outperform the equities following the "worst Q1 ever for 30-year Treasury & 3rd best ever YoY gain for SPX in Mar," says Hartnett, who reminds investors that $602 billion flew into global stocks in the past 5 months to exceed inflow of prior 12 years ($452bn).

He further advises traders to use “pain trade” to "position for inflation, tapering, taxation," and "sell bonds, tech, any momentum comeback vs quality." Next 6 months, investors should:

  1. Buy US defensives (utilities & staples) as market hedge Q2, macro hedge H2;
  2. RoW Last of Laggards (LoLs)...UK/EU banks/resources, Japan consumer, China/EM banks/industrials as vaccine allows RoW H2 reopening.

Here are key flows from the last week, as per BofA’s Flow Show:

“A. The largest outflow from HY bonds in 6 weeks; b. largest outflow from EM equities since early Jan’21 ($1.3bn) vs. largest inflow to European equities in 14 weeks ($1.4bn); c. record 9-week inflow to value stocks ($31.8bn), moderate inflow to tech ($1.0bn), first energy outflow in 30 weeks ($0.5bn).”

As much as $14.6 billion flew into stocks last week, compared to $13.7 billion into bonds, and $8.7 billion into cash.

BofA Bull & Bear Indicator is now down to 7.1 from 7.2.

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