The decision is “based on a lower trading price today netted against a reduction in our equity risk premium assumption on lower rates volatility,” strategist Savita Subramanian and team wrote in a note Friday.
“Note that the average peak-to-trough decline in the S&P 500 amid recessions has been ~32%. Thus, the S&P’s 10% YTD decline can be very roughly interpreted as discounting a one-third chance of a recession (one-third of the avg. peak-to-trough decline). If the probability of a recession rises, more downside risk would be expected.”
With the increased possibility of a recession, BofA is turning more defensive with a big allocation to Consumer Staples (XLP), moving two notches to Overweight from Underweight.
“The sector is near a record underweight by institutional investors, and lessening labor/input cost inflation could benefit margins,” Subramanian said.
The team also lowered Materials (XLB) to Underweight from Market Weight.
“Materials is exposed to big ticket spending via housing, autos etc, and it has the highest China beta of all sectors.”
See Goldman Sachs’ defensive pick list.