A $46 trillion wipeout in stocks and bonds won't stop until central banks...

A $46 trillion wipeout in stocks and bonds won't stop until central banks around the world launch a coordinated pivot, Bank of America says

Matthew Fox

Sep 30, 2022, 1:39 PM

Traders work on the floor of the New York Stock Exchange shortly before the closing bell as the market takes a significant dip in New York, U.S., February 25, 2020. Lucas Jackson/Reuters

• A $46 trillion wipe out in stocks and bonds over the past year has led to forced liquidations on Wall Street, according to Bank of America.
• The bank doesn't expect the bleeding to stop until the Fed launches a coordinated dovish pivot with other central banks.
• "Markets stop panicking when central banks start panicking but BoJ/BoE panics not yet credible nor coordinated," BofA said.

It's been a tough year for investors, with global stock and bond markets erasing $46.1 trillion in market value since November 2021, according to Bank of America.

The massive drawdown has led to forced liquidations on Wall Street, the bank's chief investment strategist Michael Hartnett said in a Friday note, highlighting the recent break below 2018 support in the NYSE Composite Index.

And investors shouldn't expect the pain to stop until the Federal Reserve, in coordination with other central banks, pivots away from its currently hawkish monetary policy and towards a more dovish stance, according to the note.

That's because this year's interest rate and quantitative tightening shock from the Fed has hit Wall Street's "addiction to liquidity," Hartnett said.

And while the Bank of England and Bank of Japan have recently pivoted to a more dovish stance amid turmoil in their local currency and fixed income markets, that hasn't been enough, as evidenced by the continued downtrend in stock prices.

"Markets stop panicking when central banks start panicking but BoJ/BoE panics not yet credible nor coordinated," Hartnett said, referencing the fact that the Bank of England's recent easing measures, combined with the UK government's tax cut plans, runs counter to its goal of reducing elevated inflation.

As to when such a panic by central banks might occur, Hartnett believes mid-November is a possibility, arguing that the S&P 500 could fall another 10% from current levels by then, which would "force policy panic" right when the G20 meets on November 16.

Such a policy shift from central banks would help spark a short-term relief rally, but the stock market likely won't find its ultimate low until the first quarter of next year when recession and credit shocks lead to a peak in interest rates and the US dollar, Hartnett said.

To take advantage of such a decline, Hartnett recommends investors "nibble" if the S&P 500 hits 3,600, "bite" if it falls to 3,300, and "gorge" if the index touches 3,000, which would represent a peak-to-trough decline of 37.5% from its January peak.

Based on historical data, the S&P 500 has experienced 20 bear markets over its lifetime, with a average peak-to-trough decline of 37.3%, which would be right in line with 3,000 for the S&P 500.

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