Midyear Outlook: Optimism amid uncertainty

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Chief Investment Officer Chris Hyzy answers key questions about the challenges and opportunities investors could expect through year-end.
Rising geopolitical tensions with Iran, ongoing trade wars and uncertainty about next steps with Brexit have rattled equity markets around the world, prompting investors to worry about the growth outlook for the second half of 2019. Despite such global uncertainty, Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, sees several reasons for optimism for the markets and the U.S. economy.
First, the global economy appears to be in the early part of a new period of rising growth, which Hyzy is calling a fourth mini wave cycle. Second, the Federal Reserve (Fed) has signaled that it is prepared to act by lowering interest rates if necessary. Third, China's economic growth could end up being better than expected as its stimulus begins to filter through. In addition, in the U.S., overall, financial conditions are still helping support consumer confidence, and a clearer outlook ahead could lead to improved investor sentiment and renewed buying. Finally, expected growth in productivity is likely to boost the economy while helping keep inflation in check in the medium term.
Graphic of a question mark on top of an image of a stock ticker. The text next to it reads: 2019 Midyear Outlook: Where might the markets and the economy be headed? Forecasts are provided by BofA Merrill Lynch Global Research, as of June 28, 2019.
Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. The economic and market forecasts presented are for informational purposes as of 6/28/19. There can be no assurance that the forecasts will be achieved.
In this Q&A, Hyzy offers further insights on what he believes investors can expect in the second half of 2019 and beyond. For a deeper dive, read "A Rising Tide Leads to a Great(er) Divide," from the Chief Investment Office.
Q: Given the global uncertainty, what's your outlook for U.S. markets and the economy?
A: We're still optimistic that economic growth can remain at trend levels through the rest of this year and into 2020. The economy was stronger than expected in the first quarter, the U.S. labor market and consumer spending are healthy, and inflation and interest rates remain low.
We think the next big catalyst for the current economic expansion — now in its tenth year — will be gains in productivity and new reflation efforts by central banks, especially the Fed. Automation, big data, artificial intelligence, the cloud and advanced software should drive a new wave of productivity over the longer term, allowing growth to continue while keeping inflation in check.
In the near term, escalating trade disputes and other possible disruptions could lead to fading business confidence and delay capital investment plans, which could weigh on corporate earnings and economic growth. But if we can get past the uncertainties that have been weighing on the market, we believe equities can reach new highs again by the end of 2019.
If we can get past the uncertainties that have been weighing on the market, we believe equities can reach new highs again by the end of 2019.
— Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank
Q: What is the Federal Reserve likely to do about interest rates in the coming months? And what could happen with bond yields?
A: With inflation falling, the Fed has signaled that they will "act as appropriate to keep the expansion going." The market is now pricing in two to three rate cuts by the end of January 2020.
If the Fed does cut the short-term Federal Funds rate, that should help steepen the yield curve, which has been inverted recently in certain spots — meaning that yields on shorter-term bonds have moved higher than those on longer-term bonds. An inverted yield curve is often seen as a signal that a recession could be coming, and a Fed rate cut could help improve investor sentiment while supporting economic activity.
Q: Do you think the U.S.-China trade dispute will eventually get resolved? What could a deal look like?
A: We think there will be some kind of deal, because it's in the interest of both countries to reach one. But the deal is more likely to be a truce than a substantive long-term agreement. The U.S. is looking for a rising "growth story" as the 2020 U.S. election season heats up, and China's domestic economy continues to need support. The deal that's ultimately reached may seem somewhat diluted from what was expected, but any agreement should help reduce uncertainty in the markets and make it easier for companies to manage their supply chains.
However, the prospect of a long-term resolution any time soon has diminished considerably, and additional tariffs and trade restrictions based on national security concerns could lead to higher tensions and take a toll on business confidence.
Q: What other risks do you see on the horizon? Could they cause volatility to flare up?
A: For the past several months, the possibility of a "hard" or a "no-deal" Brexit seemed to be off the table for the United Kingdom's departure from the European Union (EU). But with Theresa May's June exit as prime minister, worries about that scenario have returned. The next deadline for a negotiated deal with the EU is October 31, and if there actually is a hard Brexit, it could disrupt global trade and unsettle financial markets. Tensions between the U.S. and Iran, which continue to run high, are another ongoing concern. A potential about-face by the Fed would also be a problem, but we don't think that's in the cards.
Q: What portfolio strategies should investors consider now?
A: We continue to prefer equities relative to fixed income. Given our constructive view, we would use any market pullbacks to add to equity exposure.
In general, we favor U.S. stocks over those of other developed markets and even over emerging market equities, although we think that rising consumer demand in many emerging economies — particularly Asia — could make them a strong long-term growth opportunity.
In the U.S. market, we continue to prefer large-cap stocks over small caps, and we see emerging opportunities in technology, financials and industrials, particularly if the yield curve steepens and growth momentum returns.
In the U.S. market, we continue to prefer large-cap stocks over small caps, and we see emerging opportunities in technology, financials and industrials.
— Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank
In fixed income, we have a slight preference for shorter-term investment-grade corporate bonds, especially from banks, and for both intermediate- and long-term municipal bonds.
As always, investors should keep their long-term goals in mind when planning their investment strategy. We suggest investors consider using diversification to help protect against any volatility that may occur through year end.
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The views expressed are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill or Bank of America entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation. The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.

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