Bank of America: Credit tightness could trigger passive selling, stocks face bear market signals

BofA strategists said further stress in credit markets could trigger a fresh broad-based sell-off in equities as long-term investors, including pension funds, are forced to sell assets. Savita Subramanian at BofA Securities said: "If volatility in private credit markets continues, institutions such as pension funds may be forced to sell index funds to avoid valuation adjustments for private assets." Passive investing "dominates the S & P 500", so the market decline will force further sell-offs in index funds, she said. Matt Maley, chief market strategist at Miller Tabak +, also pointed out that ETFs in the banking sector could exacerbate the selling pressure. "Given that bank ETFs have weakened significantly, further modest declines could confirm a significant shift in the trend for bank stocks." BofA also pointed out that the S & P 500 index appeared "statistically expensive" on 20 different valuation measures, indicating that the three-year bull market is facing increasing valuation risks and the probability of a market downturn is increasing.