US stocks are likely to be hit by a wave of redemptions, warns Chris Wood

US equities are likely to be hit by a 'wave of redemptions' as the US Federal Reserve (US Fed) tightens its monetary policy and winds down its bond-buying program, warned Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

US domestic equity exchange traded funds (ETFs) recorded an estimated net outflow of $20.7 billion in the week ended 20 April, following a net outflow of $7.9 billion in the previous week. As a result, there was an estimated net outflow of $26 billion in the first three weeks of April, exceeding the previous record monthly outflow of $24.8 billion reached in January 2019, reports suggest.

"This is a reminder that before the monetary tightening-triggered correction or bear market, call it what you will, is over US stocks are likely to be hit by a wave of redemptions. And because many of the ETFs own the same big cap stocks, it is likely to lead to significant declines in the previous market leaders. There are, for example, 14 ETFs traded in America indexed to the S&P 500 with total assets under management of nearly $1 trillion," Wood wrote.

This process, according to Wood, is already well underway with Netflix now down 69 per cent year-to-date (YTD) and the company formerly known as Facebook down 48 per cent. Amazon looks the next most vulnerable to Wood, down 17 per cent so far this year, with Apple (down 12 per cent YTD) and Alphabet (down 21 per cent YTD) likely to be more resilient for longer.

Meanwhile, the US economy shrank at an annual rate of 1.4 per cent in the March 2022 quarter, data showed. “In the first quarter, an increase in Covid-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country,” the department's Bureau of Economic Analysis (BEA) said in an advance estimate note.

The development comes at a time when the US is battling a four-decade high inflation rate of 8.5 per cent recorded in March 2022. All this, analysts believe, can see the US central bank hike rates aggressively. Those at Nomura, for instance, see the US central bank hiking rates by as much as 75 basis points (bps) in its June and July meetings. The FOMC is scheduled to meet next on May 3 and 4.

"The FOMC realizes it is far behind the curve and is desperate to catch up. The Fed is frontloading its tightening cycle and likely to take big steps at the next couple of meetings. While the series of negative supply shocks may not pull the US economy into recession, the Fed’s late attempt to get inflation under control is likely to push the economy over the edge." wrote Philip Marey, senior US strategist at Rabobank International in a recent report.