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Fresh record highs for the S&P 500 aren't enough to assuage Bank of America Securities clients, who sold US stocks for the seventh straight week heading into Independence Day.
Bank of America Securities clients edged out of individual stocks by a net $200 million but bought ETFs for the ninth consecutive week, according to a July 7 client note from a team of Bank of America strategists led by Jill Carey Hall. That's in line with a multi-year shift to passive investing from active management, Hall wrote.
Hedge funds and retail clients are on the run, ditching stocks for the second week in a row to the tune of $1.4 billion and $300 million last week, respectively, the note read. Conversely, institutional clients rode the rally for the third straight week and were net buyers of $500 billion.
Growth's impressive rally is a "head-fake"
Growth stocks have rocketed higher in recent weeks after a rocky start to the year as evidence builds that hot inflation, reflected by surging commodity prices, is transitory and will fade when the US economy fully reopens. High inflation makes stocks' future earnings less valuable.
But BofA Securities clients took profits in the consumer discretionary, communication services, and technology sectors last week, the strategists wrote, after respective runs of 6.7%, 3.7%, and 8% in the last month. The consumer discretionary and communication services sectors had the largest outflows in the first half of 2021, while communication services and technology have seen "record or near-record sales over the last four weeks," strategists noted.
The contrarian move comes as bond yields — which move inversely to bond prices and tend to rise with inflation — have collapsed. The 10-year US Treasury note yield is down 15% in the last month to 1.3%. In theory, falling yields reflect weaker inflation and should lift growth stocks.
But investors seem to be increasingly anxious about the strength of the global recovery as COVID-19 cases persist, driven by the new delta variant. Investors expect risky assets like growth stocks will take a breather amid the uncertainty after an outstanding June run.
BofA clients aren't simply keeping money on the sidelines, however. Five sectors saw net inflows last week, according to the Bank of America strategiests: consumer staples, financials, health care, materials, and utilities.
Bank of America believes its clients are wise to rotate out of growth stocks and into economically sensitive and defensive sectors, the strategists wrote, adding that value will regain the momentum it found early in the year as funds continue to position for a US economic recovery.
"While fund positioning in cyclicals has risen off last year's levels, it hasn't risen by much, and funds remain tilted toward growth vs. value and anti-inflation vs. pro-inflation stocks," BofA strategists wrote. "We view growth's recent outperformance as a head-fake and prefer value (energy) and quality (financials)."
Investors can follow BofA clients and add exposure to these five sectors with the following ETFs: Consumer Staples Select Sector SPDR Fund (XLP), Financial Select Sector SPDR Fund (XLF), Health Care Select Sector SPDR Fund (XLV), Materials Select Sector SPDR Fund (XLB), and Utilities Select Sector SPDR Fund (XLU).
Economically sensitive sectors like energy and real estate were the only sectors to see net inflows in the first half of the year, while financials and materials saw neutral flows in that span. The healthcare sector has "solid fundamentals and attractive valuations," the note read, though it was one of the most-sold sectors in the first half of 2021.
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