Dealing with volatility: What you need to know now

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Timely insights to help you manage risk when markets shift.
August 15, 2019

Bond market signals recession concerns

The opinions are those of the author(s) and subject to change.

So, what just happened?

During an already volatile week, markets plummeted on Wednesday in response to heightened concerns about slowing global growth. Of particular concern was the inverted yield curve — when longer-term interest rates are lower than short-term rates — a condition that has historically signaled the possibility of recession. A portion of the Treasury yield curve inverted, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, while the yield on the 30-year Treasury bond fell to its lowest level ever. "Disappointing economic data out of Germany and China, rising tensions in Hong Kong, and the lack of clarity in both the Italian political situation and the Brexit end game added to investor concerns," he adds. Hyzy offers more insights in the audiocast and commentary below. For a better understanding of the yield curve, read Learning the Curve PDF from the Chief Investment Office.

Here's our take on what this means

"While the probability of a recession has increased, we believe the United States can avoid a recession in the next 12 months," Hyzy says. He points to the strength of the U.S. consumer, a still-healthy jobs market, and the potential for the Fed to be more assertive with its monetary policy through the remainder of the year. "We will be watching credit markets for further signs of stress and unemployment claims for any signs that business confidence is waning," he adds.
While the probability has increased, we believe the United States can avoid a recession in the next 12 months.
— Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

What should investors do right now?

"We remain cautiously optimistic on the broader markets," Hyzy says. Investors may want to let the volatility subside, and then consider adding higher quality and higher yield stocks, including utilities and consumer staples. Medium and longer term Investors should consider a diversified mix of growth and value stocks, including industrials, healthcare, technology, and financials, Hyzy believes. "Lastly, we still emphasize U.S. equities relative to the rest of the world, given the strong consumer and our view that we are still in the early stages of a very long innovation cycle."
Read Learning the Curve PDF from the Chief Investment Office to find out more about the yield curve and what it may say about the markets and the economy.
Information is as of 08/14/19

Investing involves risk, including the possible loss of principal.

Opinions are those of the author and are subject to change.

Past performance is no guarantee of future results.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments.

Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

Please read important disclosures below.*
August 6, 2019

Trade tensions rattle markets, but fundamentals remain strong

The opinions are those of the author(s) and subject to change.

So, what just happened?

The Dow jones Industrial Average plunged 767 points on MondayFootnote 1 in response to new rounds of trade hostilities between the United States and China. U.S. stock futures showed signs of recovery early Tuesday.Footnote 2 However, "until the world's two largest economies settle their differences, investors need to brace for episodic bouts of trade volatility," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. He offers a closer look at what investors should watch for in the latest "Investment Insights," Market Update: One Hand Washes the Other PDF, and the accompanying audiocast (see below) released on August 5.
What precipitated the massive sell-off? President Trump last week announced 10% tariffs on $300 billion of Chinese goods starting September 1. "These tariffs, if implemented, would be the first to target consumer goods, and could open a whole new front in the U.S.-China trade war," says Hyzy.
The Chinese government retaliated by devaluing its yuan (a move that decreases the price of exports and increases the price of imports) and ordered state-owned companies to suspend U.S. agricultural imports. The U.S. responded by declaring China a currency manipulator.Footnote 3 For investors, the measures at least temporarily offset the good news of last week's Federal Reserve interest rate cut. Yet over the long-term, Hyzy says, monetary policies and U.S. economic and market fundamentals offer strong signs of encouragement.

Here's our take on what this means

These heightened tensions brought the trade truce to an abrupt end and may in the near term result in waning business confidence and a pull back by investors. But there are reasons for optimism. Among them: better-than-expected U.S. corporate earnings, consumer-driven growth in U.S. GDP, and capital expenditures by companies experiencing productivity gains.
Economics continue to believe the Fed will cut a cumulative 75 basis points, with the next cuts in September and October," Hyzy notes. Such measures by the Fed and other central banks are aimed at preventing deflation and possible recession as many economies outside the U.S. continue to struggle. More aggressive actions may be needed the longer the Fed waits to adjust policy more sharply and quicker.

What should investors do right now?

"We believe investors should allow markets to settle down for now," says Hyzy, "but be ready to consider strategic stock investments, where appropriate, the closer we get to the next Federal Reserve meeting" on September 17-18. If anything, the latest trade battles could create buying opportunities as stocks experience "a small reset back to more attractive levels," he adds.
As for which stocks to consider, "We continue to prefer the U.S. versus the rest of the world, and large-cap versus small-cap companies," Hyzy says. Investors should consider a balanced mix of value and growth stocks offering yields of 2% or better and double-digit earnings growth. Attractive sectors include technology, industrials, healthcare, and financial services. High-quality, short-duration government bonds can help offset risks associated with equities, Hyzy adds.
Footnote 1 https://www.cnn.com/2019/08/05/investing/dow-stock-market-today/index.html

Footnote 2 https://www.marketwatch.com/story/us-stock-futures-sink-suggesting-more-steep-losses-on-tuesday-2019-08-05

Footnote 3 https://www.nytimes.com/2019/08/05/business/economy/us-china-yuan-renminbi-trump.html?action=click&module=Top%20Stories&pgtype=Homepage


Information is as of 08/06/19

Investing involves risk, including the possible loss of principal.

Opinions are those of the author and are subject to change.

Past performance is no guarantee of future results.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments.

Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

Please read important disclosures below.*
May 24, 2019

What the U.S.-China standoff means for investors and the economy

The opinions are those of the author(s) and subject to change.

So, what just happened?

Hopes for a swift resolution to the U.S.-China trade dispute dimmed somewhat yesterday as China warned that the United States must correct its "wrong actions" before talks can proceed. That, combined with uncertainties over Brexit and tensions with Iran, are what's behind the latest bout of stock market volatility, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

Here's our take on what's next.

In the next few months, it's likely that we could experience some moderation — perhaps even contraction — in growth as continuing trade tensions weigh on investor sentiment and business confidence, says Hyzy. "We expect a trade deal to come into focus the closer we get to the 2020 election cycle — perhaps even as soon as late June with the G20 economic summit," he adds. There's incentive for the U.S. to bolster its strong economic growth, and China's domestic economy needs support.
"It's also important to keep in mind that the unfolding trade war is not just about economics," he notes. "What's playing out is a battle for technological dominance, which has implications for capital investment, supply chain management, and a significant increase in domestic job creation in the years ahead."
The unfolding trade war is not just about economics. What's playing out is a battle for technological dominance.
— Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

What should investors do right now?

"Markets are likely to remain fragile over the short term as investors try to price in the evolving scenarios," Hyzy says. As uncertainties resolve, "we still expect U.S equities to reach new highs in the next six to 12 months." Investors who have been waiting for attractive prices should use the current weakness as an opportunity to strategically add stocks to their portfolios, he suggests.
Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

All sector recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Please read important disclosures below.*
May 14, 2019

Volatility and opportunity amid the latest trade tensions

The opinions are those of the author(s) and subject to change.

So, what just happened?

The Dow Jones Industrial Average dropped more than 600 points yesterday as China announced a new round of tariffs on $60 billion in U.S. goods. That was just the latest volley in a trade war that dramatically reheated last Friday when the U.S. raised tariffs on $200 billion of Chinese goods to 25% from 10%. "This sharp brinkmanship is pressuring stocks and other risk assets across the board," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Cyclical stocks in areas such as technology, industrials and consumer discretionary have taken the largest hit, Hyzy notes, and flaring tensions between the world's two largest economies could do long-term damage if left unresolved. Yet both countries have strong incentives not to let that happen, he adds. And for now, the underlying economy and market conditions remain healthy.

Here's our take on what this means.

Risks from the tariffs go well beyond rising prices for consumers and businesses. "The secondary effects on future capital investment, inventory accumulation, and supply chains are just as important. All of these could affect business confidence, the longer the stalemate lasts," he says.
We believe that the U.S. and China will reach a trade deal before we see major, negative consequences.
— Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank
While we may see another round of "tit-for-tat" tariff increases, a full-blown trade war is unlikely, he says. "We believe that the U.S. and China will reach a trade deal before we see major, negative consequences." Barring an extended trade war, Hyzy offers several reasons why he expects the bull market to resume:
  • The economy is in the early stages of a new growth phase that should extend well into 2020.
  • The Federal Reserve appears willing to keep plans to increase short-term interest rates on extended hold, even if inflation runs above the Fed's long-term target of 2%.
  • China's economic growth is stronger than many observers believe, giving China the flexibility for effective policies if the trade war intensifies in the short-term.
  • Overall financial conditions, including low interest rates and inflation, narrow credit spreads, healthy consumer confidence and a stable U.S. dollar, should help support business confidence and a healthier picture for emerging markets once the trade dispute ends.
  • Investors remain cautious, especially with stocks, thus limiting the possibility that markets will become over-valued.
  • Automation, big data, artificial intelligence and other developments will drive business productivity for years to come, supporting corporate profits and mitigating the effect of higher wages. "This should help smooth out the potential earnings weakness if the trade deal lasts longer than expected," Hyzy says.

What should investors do right now?

"We will continue to closely monitor the trade confrontation," Hyzy says. While unresolved disputes could ultimately affect the economy and markets, investors should stick to their long-term investment strategies and look for opportunities in an economy that remains healthy, Hyzy notes.
"We view this latest sharp weakness in the equity markets as a buying opportunity for long-term investors. We continue to prefer stocks versus bonds, the U.S. and emerging markets versus other regions, and large cap versus small cap stocks," he adds. Promising sectors include some of those hardest hit by the latest volatility — including technology, financials and industrial companies. Meanwhile, ongoing consumer confidence creates opportunities in the consumer discretionary segment.
For more insights on current volatility and future economic growth prospects, read "A New Summit: Six Reasons for Higher Highs" from the Chief Investment Office.
Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

All sector recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Please read important disclosures below.*
December 18, 2018

What could a government shutdown mean for investors?

The opinions are those of the author(s) and subject to change.
The prospect of a government shutdown on Friday adds one more concern for investors during this period of volatility in the markets. "Equity markets are already on edge" over everything from the Federal Reserve's interest rate plans to U.S.-China trade tensions, notes the Chief Investment Office (CIO) in its "Investment Insights: Another Government Shutdown? What It Could Mean for the Economy and Markets." "A potential government shutdown would likely weigh on prices in the short term."
Yet while government shutdowns can add to short-term volatility and result in furloughs of federal employees, they tend to be short-lived, with little long-term effect on the economy or markets. Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher when it ended.
Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher."
What services would be affected?
For the government's fiscal year ending September 30, 2019, five appropriations bills have already been passed that account for about 75% of government operations, notes the "Investment Insights." In any case, "mandatory programs like Medicare and Social Security are always maintained, as are other essential functions, such as air traffic control, law enforcement, and security activities."
For a closer look at the potential for a government shutdown on Friday, read the Chief Investment Office report, "Another Government Shutdown? What It Could Mean for the Economy and the Markets."
Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Please read important disclosures below.*
December 5, 2018

Why the market is still volatile — and how the Fed could help

The opinions are those of the author(s) and subject to change.
The Dow's decline of nearly 800 points Tuesday signaled ongoing fears of slower economic growth, with volatility likely to continue into the new year, says Chris Hyzy, Chief Investment Officer for Merrill Lynch and Bank of America Private Bank. "Housing weakness, wider credit spreads, and an inversion at a few points on the yield curve are all contributing to higher volatility and lower prices," he notes.
Credit spreads refer to the difference in return, or yield, between U.S. Treasury bonds and higher-risk corporate bonds of the same duration, Hyzy explains. The yield curve reflects the difference in return rates between short-term and long-term government bonds. Widening spreads and yield curve inversions (when yields for short-term bonds become higher than those for long-term bonds) both are seen as potential signs of a weakening economy.
The Federal Reserve could help stabilize markets by signaling that interest rates are at an appropriate level, but that isn't likely until next year."
— Chris Hyzy, Chief Investment Officer for Merrill Lynch and Bank of America Private Bank
"The Federal Reserve could help stabilize markets by signaling that interest rates are at an appropriate level," Hyzy adds, "but that isn't likely until next year." Also needed: greater evidence that the U.S. and China are serious about resolving their trade differences. "Until we get confirmation in these two areas, market activity is likely to remain choppy and directionless," says Hyzy.
Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

International investing presents certain risks not associated with investing solely in the U.S. These include, for instance, risks related to fluctuations in the value of the U.S. dollar relative to the value of other currencies, custody arrangements made for a fund's foreign holdings, political risks, differences in accounting procedures and the lesser degree of public information required to be provided by non-U.S. companies. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.
Please read important disclosures below.*
Next steps

* Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Neither Merrill Lynch, Bank of America Private Bank, nor any of their affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Asset allocation, diversification, dollar cost averaging and rebalancing do not ensure a profit or protect against loss in declining markets.

Investing involves risk, including the possible loss of principal. No investment program is risk-free, and a systematic investing plan does not ensure a profit or protect against a loss in declining markets. Any investment plan should be subject to periodic review for changes in your individual circumstances, including changes in market conditions and your financial ability to continue purchases.

It is not possible to invest directly in an index.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).

Past performance is no guarantee of future results.

This material was prepared by the Chief Investment Office (CIO) and is not a publication of BofA Merrill Lynch Global Research. The views expressed are those of the CIO only and 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 Lynch or Bank of America Private Bankentity 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.

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The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in high-yield bonds may be subject to greater market fluctuations and risk of loss of income and principal than securities in higher rated categories. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Income from investing in municipal bonds is generally exempt from federal and state taxes for residents of the issuing state. While the interest income is tax exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the federal alternative minimum tax (AMT).

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