Weekly Market Recap Report from Bank of America Global Research

Candace Browning

Head of BofA Global Research

May 8, 2022

Happy Mother’s Day. This week we cover what all mothers deserve on this special day – good news, food & health! (… but precious metals can’t hurt either)

The first 50bp Fed hike since 2000 is now behind us and sentiment has been poor for weeks, but BofA Global Research Chief Investment Strategist Michael Hartnett believes we have yet to reach the lows for equities. He points out that in the last 19 bear markets the average peak to trough decline has been 37% with an average duration of 289 days. So if history were to repeat, then today’s bear market ends in Oct 2022 with the S&P at 3000. Furthermore, the NYSE composite is down 9% YTD and sits at the 100-week moving average, but recession and crises in the past 25 years have always seen this barometer break decisively below the moving average. The good news is that about half of the NASDAQ is down 50% or more and many of the most speculative assets – crypto, EM (emerging markets) and speculative tech – peaked in 1Q21. Although commodities tend to perform well in stagflation environments, and should be secular winners, Michael believes commodities should be sold on rallies this year given recession risk.

Agricultural food prices jumped 37% in March after a 28% rise in 2021, and our commodities team suggests there’s room for further upside given supply issues related to the Russia-Ukraine war. The pass through from agriculture price changes is relatively slow, leading BofA Global Research Global Economist Ethan Harris and team to believe food inflation will remain elevated for the rest of the year. Higher prices are more of an issue for emerging markets than developed ones – food accounts for about 50% of CPI (consumer price index) in Zambia and India, but less than 15% in many developed markets. Higher food prices could lead to political instability, and we believe Africa is most vulnerable as the continent has the biggest dependency on food imports. China, however, should see limited CPI impact from higher agriculture prices according to our China economist, Helen Qiao. Rice, opposed to wheat or corn, is the more important grain for China and it’s sourced locally. Despite higher feed costs, hog prices are likely to stay at low levels for now given abundant supply.

Now is the time to own Health Care stocks and you’re going to get sick of us telling you all the reasons why. Health Care is our U.S. Equity Strategy team’s top sector overweight and for those worried about the market, it’s a consistent outperformer in both late cycle & downturns. U.S. Equity and Quantitative Strategist Savita Subramanian argues that Health Care gives investors defense, growth and yield at a reasonable price, with the sector trading at a near-record discount to the S&P 500. First quarter earnings call transcript analysis revealed Health Care as the most upbeat sector. The sector also benefits from tailwinds including aging demographics and the aftermath of a global pandemic which is likely to accelerate consumer and corporate spending on health. One of the biggest overhangs on these stocks has been regulation, but Savita thinks that this is overdone.

While Western countries have imposed sanctions on Russian steel and diamonds, other mined resources such as platinum and palladium have so far been exempt. The reason is that the auto industry relies heavily on these resources. Currently, Russia accounts for 39% of global palladium supply, and it’s estimated only half of this output could be replaced over the next 5 years. EEMEA Metals Strategist Michael Widmer tells us that while South Africa has the monopoly on platinum-group metal reserves, translating this into actual production is not straightforward. The war in Ukraine has increased the focus both on energy independence and the energy transition. Diversifying sources of energy has brought attention back to the “green” hydrogen economy, which is platinum-intensive. Unlike palladium, Russia only accounts for less than 11% of platinum supply. Longer term, Michael explains that palladium's importance for the global economy will likely fade as there are more electric vehicles on the road, while platinum, produced predominantly in South Africa, will likely become more important.

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