Recently, the US stock market has experienced severe fluctuations, with the S&P 500 Index dropping 8% over the past month. Investor concerns about the outlook for US stocks are increasing day by day.

In response, top Wall Street Analyst and Bank of America strategist Michael Hartnett discussed his judgment on the market in a recent report: the current decline in the US stock market is not the beginning of a bear market, but merely a "dumb correction."

He suggested that investors should pay attention to six key signals to determine whether the correction has ended, which are: Bank of America FMS cash levels, global growth expectations and stock allocations, BofA bull-bear indicators, global equity fund redemptions, BofA global equity breadth index, and US high yield bond spreads.

In light of the correction, Hartnett does not recommend shorting US stocks, but instead suggests buying when the S&P 500 drops to 5,300 points, at which point the BofA FMS cash level may exceed 4% and the high yield bond spread approaches 400 basis points, with accelerated outflows. He also reiterated the "BIG" strategy, which involves holding bonds, international stocks, and Gold long-term until 2025.

It is noteworthy that Hartnett successfully predicted the market's top signal earlier. As early as the end of December last year, he warned that Bank of America's sell signal had been triggered, indicating that the market was about to peak. The subsequent market performance confirmed his judgment, as US stocks experienced a rapid adjustment, pulling back 10% within 20 days, making it the fifth fastest adjustment speed in the past 75 years (the fastest was during the initial outbreak of the COVID-19 pandemic, taking only 8 days).

"Dumb correction" rather than a bear market; six signals to determine when the adjustment will end.

Despite successfully warning of the last market correction, Hartnett has made it clear this time that the current decline in US stocks is not the beginning of a bear market, but just a correction, and he reminds readers:

When policymakers begin to panic, the market will stop panicking.

Since a bear market in stocks signals an economic recession, a further decline in the stock market will prompt trade and monetary policy to shift towards easing to avoid an economic downturn. Historical experience suggests that around 5300 points on the S&P 500 Index would be a good buying opportunity. At that time, Bank of America's FMS cash level will soar above 4%, the spread on High Yield Bonds will approach 400 basis points, and outflows from stock funds will accelerate.

However, Hartnett also reminds investors that the current market trend of 'yields and stocks falling together' is concerning and resembles the situations before market crashes in 2000, 2002, and 2008, indicating that there may still be pain in the market.

He suggested paying attention to the XBD broker-dealer index; if this index falls below 750 points, it will be an important bear market signal.

Hartnett proposed six key signals to help investors determine when this round of 'fool's adjustments' will end:

1. Bank of America's FMS cash level rises to >5%: When the cash level of Bank of America's FMS rises above 5%, or increases by 60 basis points within 1-2 months, it will trigger a 'buy signal'. If the March global FMS (released on March 18) shows that the cash level has risen from 3.5% to above 4.1%, it will end the 'sell signal' triggered in December, indicating that this round of adjustments is nearing its end. (Note: The 'sell signal' of Bank of America's global FMS cash rules was triggered on December 17, after which the 'Seven Giants' fell by 20%, Nasdaq dropped by 14%, S&P 500 Index declined by 9%, MSCI Global Index decreased by 5%, and MSCI EFA Index increased by 6%)

2. A significant decline in Bank of America's global growth expectations and stock allocation: Bank of America's global growth expectations (at -2% in February) and global stock allocation (at +35% in February) fell by more than 20 percentage points within a month.

3. Bank of America Bull-Bear Indicator drops to 2: A drop in the Bank of America Bull-Bear Indicator from the current 5.2 to 2 will trigger a 'buy signal'.

4. Global Equity Fund Redemption Tidal Wave: Global equity fund redemptions approached around 1% of the Asset Management scale (equivalent to an outflow of 200 billion USD in 2025, while year-to-date inflows are 156 billion USD).

5. Bank of America Global Equity Breadth Index Plummets: The Bank of America Global Equity Breadth Index has fallen to -60% (meaning that 60% of the stocks in the MSCI Global Index are trading below their 200-day and 50-day moving averages). The index currently stands at +27%.

6. The spread of High Yield Bonds in the USA has significantly widened: The spread of High Yield Bonds expanded from 340 basis points to 400 basis points, an increase of 150 basis points.

Hartnett summarized that this year, the positioning strategy of 'stocks up, yields up, dollars up' has been severely impacted, but sentiment, positioning, and price signals indicate that the stock market adjustment is not over yet. Therefore, he suggests that investors should buy the S&P 500 Index at 5300 points when 'Bank of America FMS cash levels surge above 4%, High Yield Bond spreads approach 400 basis points, and stock fund outflows accelerate.'

The 'nominal prosperity' of the US stock market may have peaked, and the investment strategy for 2025: 'BIG' is the New King.

Hartnett believes that nominal GDP in the USA has grown an astonishing 50% over the past five years, but this is largely unsustainable. Trump's base prefers to see a smaller government and low inflation, which means that the factors that once drove market prosperity are reversing.

Therefore, Hartnett has doubled down on the 'BIG' strategy this week:

The overall situation is that the era of 'nominal GDP prosperity' in the USA is coming to an end, and investors should shift their focus to the 'BIG' strategy, which includes Bonds, International markets, and Gold.

• Going long on Bonds (Long Bonds): Hartnett recommends going long on 30-year US Treasuries, betting on a bull flattening of the US yield curve. He believes that a significant decrease in US government spending (which has grown by 65% to 7 trillion dollars over the past 5 years, and by 12% over the last 12 months) signals the beginning of a "US government recession." Both "Investment" and "Consumer" face downward pressure, while US inflation remains above 3%, which implies that the Federal Reserve cannot proactively cut interest rates in H1. A decline in bond yields will become an automatic stabilizer for economic growth.

• Going long on International Markets (Long International): Hartnett is bullish on the global stock market, believing it is undervalued and has catalysts. The forward PE of the UK stock market is 12 times, China is 13 times, Europe and Emerging Markets are 15 times, while the USA is as high as 21 times. Geopolitically, the end of conflicts like the Russia-Ukraine conflict, switching from war to peace, is unfavorable for the technology, defense-dominant USA but favorable for the mercantilist and oil-dependent Asia and Europe. Regarding the Chinese market, he believes the emergence of DeepSeek indicates that China has not fallen behind in the AI race, and the market cap of China's BATX (Baidu, Alibaba, Tencent, Xiaomi) still has significant room to catch up with the "Seven Giants" in the USA. In the European market, the corporate bond yield spread in Europe has now fallen below that of the USA for the first time since 2021, indicating that the market believes Europe will achieve stronger nominal growth through fiscal stimulus.

• Going long on Gold (Long Gold): Hartnett believes that with the weakening of the US dollar, Gold is the best tool to hedge against trade wars and the collapse of real interest rates. The peak of the "American exceptionalism" means the dollar may also peak. Whether it is a second wave of inflation or the Federal Reserve being forced to cut rates significantly, both may lead to the collapse of real interest rates, making Gold the best hedge for both scenarios. Additionally, Gold is the best safe-haven asset to deal with a full-scale trade war.

Overall, Wall Street's most accurate Analyst Hartnett believes that the current US stock market is undergoing a "fool's adjustment," not the beginning of a bear market. Investors should closely monitor the six key signals he proposes to determine when the adjustment will end. In terms of investment strategy, this week Hartnett continues to tirelessly promote his "BIG" strategy, which is to go long on bonds, international markets, and Gold, rather than US stocks.

Editor/Somer