These are the 6 reasons why stocks are 'divorced from reality,' according to BofA

• Bank of America chief investment strategist Michael Hartnett outlined six reasons why the stock market continues to rally amid dismal economic data in a note Thursday.
• One reason could be "fake markets," according to Hartnett.
• "Government and corporate bond prices have been fixed by central banks...why would anyone expect stocks to price rationally?" he wrote in the note Thursday.
• While investors are still positioned bearish, Hartnett said policy makers are causing "immoral hazard" forcing investors to buy, banks to lend, and corporate zombies to issue debt this year.
• Read more on Business Insider.

Since the most recent market lows, Bank of America has been fielding a number of questions about stock performance, such as "who is going bust?", "when will we retest the lows?", and "why is the stock market so divorced from reality?"

For the last question, there are six reasons (each bolded below) that chief investment strategist Michael Hartnett outlined in a Thursday note. Economic data has continued to deteriorate — this week, initial jobless claims showed that in nine weeks, nearly 39 million Americans have filed for unemployment insurance.

Still, risk assets have rallied. The S&P 500 and the Dow Jones industrial average have each gained more than 30% from March lows, while the Nasdaq erased all losses for 2020 in early May.

That could be due to "fake markets," according to Hartnett. "Government and corporate bond prices have been fixed by central banks...why would anyone expect stocks to price rationally?" he wrote in the note Thursday.

In the past eight weeks, central banks have deployed a total of $4 trillion in asset purchases, according to Hartnett, while the global equity market cap has grown by $15 trillion. The pace of the central bank policy has come out to $2.4 billion in financial asset purchases per hour, a rate that Bank of America expects to fade to $608 million in coming weeks.

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Instead of looking at the $15 trillion market cap growth, Hartnett says that the market rally should be viewed in context of the $30 trillion collapse between February and March. As many as 2,215 out of 3,042 global stocks remain in bear markets, meaning they trade 20% or more below their all-time highs, according to the note.

Historically speaking, bear market rallies in 1929, 1938, and 1974 saw an average rebound of 61% from lows to highs, said Hartnett. That means that the S&P 500 should go to 3,180 in this rally — an additional jump of roughly 8% from where it currently trades.

Hartnett also noted that the current rally has been polarized — it's highly concentrated in growth-focused US technology stocks and "FAAMG," meaning Facebook, Apple, Amazon, Microsoft, and Google. The total market capitalization of the FAAMG group now exceeds that of the entire eurozone equity market, according to the note.

Bank of America's current strategy can be described as "structurally bearish" but "tactically bullish," Hartnett said. He thinks that investors are still positioned bearish, citing the recent Bank of America fund manager survey that showed roughly 80% expect a U or W-shaped recovery from the economic crisis, and that 70% think we are still in a bear market.

Still, policy makers are causing "immoral hazard" that's forcing investors to buy, banks to lend, and corporate zombies to issue debt this year, he said.

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