In the latest RIC Report, Bank of America Merrill Lynch has come out with a new report titled “Time to Reduce Equities.” There is no hidden message in the report and it is pretty much what it sounds like.  The equity allocation is being reduced to 60% from 65% and the wonderful returns of fixed income has been raised to 35% from 30% for U.S. corporate bonds and emerging market bonds.

The bank noted that liquidity and profits which have been powering the markets since March 2009 look less potent in the coming quarters. 

The quote sums up the obvious: “we believe this is an appropriate time to make this change given the ongoing deleveraging constraints on global activity, slower earnings growth in 2012 and our more conservative US equity outlook.”

The good news is that BofA noted that while equity upside is constrained, there is still opportunity in assets that provide yield, growth and quality.

As far as the technicals, it is a break above 1,350 on the S&P that would require leadership from the banking sector; while the break below 1,100 on the S&P would signal a new global recession driven by a hard landing in China. We track the S&P via the SPDR S&P 500 (NYSE: SPY).

BofA is issuing from the U.S. Equity and Quantitative Strategist a 2012 year-end target of 1,350 for the S&P 500 with the best sectors being staples and technology.  So, with a 1,241 close on Monday’s S&P, BofA’s upside target for 2012 only about 8.8%.

JON C. OGG

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