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Breaking insights on the economy, market volatility, policy changes and geopolitical events.
July 29, 2022

Rates up, GDP down: A mild recession in the wings?

In its ongoing fight against inflation, the Federal Reserve (the Fed) on Wednesday hiked interest rates by .75% for the second month in a row — the largest two-month increase since the 1980s.Footnote 1 This marked the fourth time the Fed has raised rates in 2022, after years of near-zero interest rates and low inflation.
In his remarks explaining the rate hike, "Chair Jerome Powell clearly stated the Fed will do what is necessary to break the back of inflation, and the markets applauded that commentary," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. The S&P 500 rose by 1.8% on Wednesday. The Dow Jones Industrial Average rose .8% and the tech-heavy Nasdaq Composite index jumped 3.2%, boosted also by better-than-anticipated earnings reports from some tech companies.Footnote 2
Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank next to his quote 'The most important question right now is how much corporate earnings could contract as the Fed continues its tightening policies.'
Signs of recession?
Following Wednesday's Fed announcement, the Bureau of Economic Analysis on Thursday reported that U.S. GDP dropped by .9% in the second quarter, the second quarterly decrease in a row, surprising economists who had expected a slight increase.Footnote 3 While two significant consecutive declines in GDP often signal a recession, "technically, we're not there yet," believes Hyzy. "But the probability is rising for a mild recession later this year or early next year," he says.
At least initially, markets shrugged off the GDP news and talk of a potential recession, with the S&P 500 gaining another 1.2% on Thursday, and the Dow and the Nasdaq posting similar gains.Footnote 4 In part, this could reflect that markets are concerned mainly with inflation and are already pricing in the impact the Fed's higher rates and tighter money supply would have on GDP, Hyzy believes.
Where will interest rates head next?
In his announcement, Powell signaled the possibility of another large increase at the Fed's next meeting in September, saying that the decision will depend on the data we get between now and then. "We foresee rate hikes continuing to the end of the year and most likely into the beginning of next year," Hyzy says. "If the Fed pauses these increases, it will be because its preferred measure of inflation, the core PCE price index, is coming down aggressively," he adds. The core PCE (for "personal consumption expenditures") excludes two items, food and energy, where rising prices have hit consumers hardest. The Consumer Price Index (CPI), which includes food and energy, will need to drop before markets — and consumers — believe inflation has turned a corner, Hyzy believes.
Preparing for the rest of 2022
Until a clearer picture emerges on inflation and the economy, investors should think defensively for the second half of the year, Hyzy suggests. That could mean lowering your exposure to high-growth stocks such as technology, and increasing proportionally to high-quality, dividend-producing companies in areas such as utilities and healthcare. While rising rates may lower the value of bonds you own, their higher yields are making bond income attractive for the first time in years, he adds. An approach known as bond laddering, investing in bonds that mature at different times, could help you capture rates as they rise, to maximize your income.
For more ideas for the balance of the year, watch Midyear outlook: Turning volatility into opportunity. And tune in weekly to the CIO Market Update audiocast series.
Footnote 1 Bloomberg, "Fed Readies Largest Rate Hikes Since Volcker: Decision-Day Guide," July 27, 2022.

Footnote 2 The Wall Street Journal, "Stocks Rise After Fed Decision on Interest Rates," July 27, 2022.

Footnote 3 CNBC, "GDP Fell 0.9% in the Second Quarter, the Second Straight Decline and a Strong Recession Signal," July 28, 2022.

Footnote 4 CNBC, "Stocks Rally for a Second Day As Investors Shake Off GDP Contraction, Dow Jumps 360 Points," July 28, 2022.
July 15, 2022

As inflation spikes, all eyes on the Fed and earnings

The latest inflation numbers, announced this week, came in much higher than expected. The Consumer Price Index (CPI) rose 9.1% from June 2021, according to the Bureau of Labor Statistics (BLS). That's the largest such increase in more than 40 years.Footnote 1 A 41.6% surge in energy prices helped drive the increase, followed by a 10.4% increase in food prices. Coming on the heels of May's 8.6% year-over-year rise, the June news dampened hopes that the economy might be ready to turn the corner on inflation.
But the inflation news hasn't been all bad. The BLS report showed core inflation (not counting energy and food) increasing by only 5.9% over June 2021, a slightly lower rate of growth than May's 6%.Footnote 2 And despite the June energy numbers, gas prices nationally have declined somewhat in recent weeks. Yet volatile energy prices could easily go higher again, and the sharp jump in the CPI virtually guarantees that the Federal Reserve (the Fed) will continue raising interest rates and tightening the money supply in hopes of bringing inflation under control.
Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank next to his quote 'The most important question right now is how much corporate earnings could contract as the Fed continues its tightening policies.'
"The most important question right now," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, "is how much corporate earnings could contract as the Fed continues its tightening policies."
What's next for the economy and your investments?
The Fed is likely to raise rates by another .75% at the end of July, with some analysts weighing the possibility of a full 1% hike — a move the Bank of Canada just made.Footnote 3 What that might mean for the economy is uncertain. Consumer spending, while declining in the face of higher prices, is not as yet signaling a recession, believes Hyzy.
"We are in a 'reset' period, moving from maximum liquidity and low rates to minimum liquidity and higher rates," Hyzy says. If inflation turns the corner soon, "we believe that corporate earnings will decline at most by 10%, after which a new cycle of economic growth could begin." But if the Fed is forced to continue raising rates and tightening the money supply, the economy could tip towards recession, with a much steeper drop in earnings. "Markets are likely to remain volatile until the inflation, interest rate and liquidity picture becomes clearer through the second half of 2022," Hyzy adds.
Strategies you can consider right now
For the time being, we suggest a more defensive approach to investing, says Hyzy. "In our multi-asset portfolios we have lowered equities to neutral from slightly overweight by lowering exposure to small-cap stocks," he notes. Investors may want to consider defensive stocks such as consumer staples and utilities and less emphasis on areas such as materials and consumer discretionary stock. Bonds remain important for diversification, and amid rising rates, "bond yields will become attractive again."
Hyzy adds, "We believe that in the next six to nine months, long-term investors may see a very important buying opportunity," with the ability to add securities at attractive prices at the onset of a new growth period.
Footnote 1 U.S. Bureau of Labor Statistics, "Consumer Price Index Summary," July 13, 2022.

Footnote 2 The New York Times, "Consumer Prices Jump Sharply Again in June: Live Updates," July 13, 2022.

Footnote 3 The Wall Street Journal, "Bank of Canada Surprises with Full-Point Rate Rise to Combat Inflation," July 13, 2022.
June 16, 2022

A bigger rate hike this time in effort to tame inflation

So what just happened? The Federal Reserve (the Fed) raised interest rates by .75% on Wednesday — the largest interest-rate hike since 1994.Footnote 1 After years of near-zero rates, this was the third increase of 2022, following a .50% hike in May and a .25% hike in March, with more likely as the Fed works to stem increasingly stubborn inflation. "We expect a similar increase in July, along with tougher talk from the Fed about monetary tightening," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
'We do see some signs that inflation may have peaked,' notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Wednesday's increase came amid sharp market volatility, driven by last week's news of 8.6% year-over-year inflation for May. "This has led to selling by investors who hoped for a sign that consumer prices had peaked," Hyzy says. On Monday, the S&P 500 dropped into bear market territory, down more than 20% from its highs in January 2021.Footnote 2 A recent Capital Market Outlook report (PDF) from the Chief Investment Office outlines the possible path for inflation and the economy during the balance of 2022 and beyond.
Here's our take on what this means
Volatility, like rate increases, is likely to continue throughout 2022 as markets look for stability, Hyzy says. "Looking out at the landscape, we see some good news, some bad news and one 'wild card' we'll be watching for in the second half of the year," Hyzy says.
The good news. Despite the worrying May numbers regarding consumer prices, "We do see some signs that inflation may have peaked," Hyzy says. "We're seeing a slowdown in U.S. wage growth, a backup in inventories and some softening in global purchases, and a deceleration in money-supply growth, among other variables," Hyzy says. If borne out, these trends could lead to a leveling out of prices.
The bad news. Even if inflation stabilizes, it will likely settle well above the Fed's target of 2% inflation, Hyzy believes. "This means the Fed will still have to be hawkish about raising rates, though how fast and how far remains unclear," he says. Rising rates in turn mean a higher risk of recession, he notes. Yet some "tailwinds" — a fading pandemic, manageable levels of consumer debt and the need for companies to rebuild depleted inventories — may prevent that from happening soon. "While we are likely to see slower GDP growth, at this point we still do not expect a recession in the next year to 18 months," Hyzy says.
A wild card. As recent events have made clear, inflation and volatility are difficult to predict with certainty. "The possibility remains that inflation could slow by more than expected," Hyzy says. This could allow the Fed to pause or ease up on future rate hikes, bringing the stability markets seek.
What should investors consider right now?
Diversification and rebalancing remain essential guidelines for navigating uncertainty. "We continue to favor high-quality, dividend-paying companies, and the U.S. versus non-U.S., as well as diversifying across small, mid- and large-cap stocks," he says. And as volatility continues, patient investors sticking to long-term strategies may find opportunities to buy assets at attractive prices.
For more insights from Hyzy on inflation, the economy and current market conditions, tune in to the CIO's weekly Market Update audiocast series.
Footnote 1 CNBC, "Fed Hikes Its Benchmark Interest Rate by Three-quarters of a Point, the Biggest Increase Since 1994," June 15, 2022.

Footnote 2 MarketWatch, "S&P 500 Ends in a Bear Market, Dow Drops Almost 900 Points As Recession Fears Rise Ahead of Wednesday's Fed Decision," June 13, 2022.
May 25, 2022

What our recession indicator is telling us

Slower growth, rising interest rates and ongoing market volatility in 2022 have raised concerns about a possible recession — defined by the National Bureau of Economic Research as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." "Though we continue to believe economic expansion will remain intact, we're closely monitoring several key risk factors," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Hyzy and others in the Chief Investment Office (CIO) are using a "recession indicator" they developed prior to the 2020 pandemic-related recession. The indicator (updated monthly) arrives at a single measure of recession risk by looking at four key economic factors:
  • Initial unemployment claims. (What's the overall health of the labor market?)
  • Housing starts. (Is construction of new homes rising or falling?)
  • Industrial production. (Are manufacturers staying busy with new orders?)
  • Vehicle sales. (How confident are consumers about making large purchases?)
Current risk level: "Moderate to Low"
The CIO team compares current data from those four areas with historical data to estimate the likelihood that a recession is imminent or underway. "Historically, recessions have started within a few months of, or contemporaneous with, the composite indicator surpassing a 50% threshold, which we classify as 'extreme recession risk,'" says Ehiwario Efeyini, director and senior market strategy analyst, Chief Investment Office, Merrill and Bank of America Private Bank. That hasn't happened yet, in spite of all of the troubling headlines. The CIO believes that "data from recent months imply low recession risk at present, with no single factor in elevated or extreme territory."
Reasons for cautious optimism
Despite recent volatility in equity markets, the unemployment rate has held steady, just above a 50-year low. And while inflation has dampened consumer confidence, spending remains healthy. Moreover, monetary policy still appears supportive. "We still view Federal Reserve (Fed) policy as highly accommodative at present and are doubtful that the recent yield curve inversion foreshadows a looming recession," Efeyini notes. (The yield curve inverts when yields on longer-term debt drop below yields on short-term debt of the same credit quality.) In fact, he points out, when the Fed funds rate is measured against the 10-year yield, the curve remains steep. "This suggests that Fed policy would still have to tighten substantially from current levels in order to reach restrictive territory," he says.
'What may result is a 'growth recession,' with the economy transitioning from very high growth to a period where the economy continues to grow but at a much slower rate,' notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Fed watch
Among the factors we're keeping an eye on, says Hyzy, is whether the Federal Reserve will succeed in its delicate balance of raising interest rates and tightening the money supply to counter inflation without going too far and stalling growth too much. "There have been very few soft landings in history," notes Hyzy. "Even if we don't tilt into recession, what may result, in my opinion, is a 'growth recession,' with the economy transitioning from a period of very high growth and excess spending — what some people might call a sugar high — to a period where the economy continues to grow but at a much slower rate."
As the CIO team continues to monitor the situation, Hyzy advises clients to avoid making precipitous decisions. Concentrate instead, he suggests, on maintaining a diversified portfolio, rebalancing periodically and investing towards your long-term goals.
To learn more about the CIO's recession indicator, read "Assessing Recession Risk: The Recession Indicator (PDF)," in Capital Market Outlook.
May 23, 2022

What will it take to reset the markets?

So, what just happened? Amid ongoing market volatility, the S&P 500 briefly fell into bear-market territory last Friday for the first time since the start of the global pandemic in early 2020. A bear market refers to a decline of 20% or more from peak levels.
Here's our take on what this means
The latest decline reflects deepening investor concern over Russia and Ukraine, pandemic-related shutdowns in China, inflation and more, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "Energy and food prices are beginning to affect corporate margins and consumer sentiment," he adds. Potential U.S. midterm election volatility and the possibility of a slowing housing market as mortgage rates rise contribute to concerns.
"As this period of uncertainty matures, markets will be searching for signs of stability to finally bottom out and create a new base," Hyzy says. Possible scenarios range from a "soft landing" to a "growth recession" (where growth continues, although at a sharply reduced level) to actual recession. A new Chief Investment Office Investment Insights report, "Five Stages of the Reset Period (PDF)," details a process that could restore stability to markets in the second half of 2022.
"For one thing, markets will be looking for concrete signals that corporate earnings do not enter a long period of decline," Hyzy says. That news, combined with an end to the shutdowns in China and restoration of order in Ukraine, could help restore investor confidence and maintain the long-term bull-market trend, he adds.
What should investors consider doing right now?
Investors are right to be "on guard" during these volatile times, Hyzy says. Yet it's important to keep things in perspective. "History tells us that even short-term recessions, while disruptive, don't necessarily spell the end of long-term bull markets," he adds. Thus, investors should avoid sudden, precipitous changes in their portfolios.
'It's our view that this latest cyclical bear-market period should eventually converge back into the secular bull-market trend,' notes Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.
"It's our view that this latest cyclical bear-market period should eventually converge back into the secular bull-market trend," he notes. In the coming months, as the markets work through current uncertainties, you might consider dollar-cost averaging — investing steadily over time — to help protect against volatility and increase your chances of adding assets to your portfolio at attractive prices. He adds, "We prefer high-quality investments across both stocks and bonds." And, with interest rates rising, "We believe that some fixed income yields are likely to become attractive again later in the year."
For regular market insights, tune in to the CIO's Market Update audiocast series.
May 5, 2022

Making sense of the latest market drop

So, what just happened? The Dow Jones Industrial Average declined 1,063 points by the end of the day on Thursday and the S&P 500 was down 3.56%. Coming on the heels of a 900-point gain for the Dow on Wednesday, the declines underscored the sharp volatility defining today's markets.Footnote 1
Here's our take on what this means
"The economy and markets are being dominated by a clash of two competing forces — inflation and slower growth," says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. As a case in point, Wednesday's gains were powered by the Federal Reserve's (the Fed) announcement that it was raising interest rates by 50 basis points as a step toward curbing inflation. Yet the drop a day later reflected the market's deepening concern that the Fed may actually still be behind the curve when it comes to controlling inflation.
"We believe these market swings will likely continue, dominated by news headlines, until we see clear signs that inflation has peaked," Hyzy says. As it seeks to balance those competing forces, the Fed would likely act quickly by slowing the pace of rate increases, if inflation appears to be dropping too fast. Global uncertainty over the Russia-Ukraine war and extended Covid-19 shutdowns in China are adding to the volatility, he adds. A new Chief Investment Office (CIO) Viewpoint article, "Clash of Competing Forces (PDF)," offers a detailed analysis of the current situation and what may be ahead.
We believe these market swings will likely continue, dominated by news headlines, until we see clear signs that inflation has peaked.
— Chris Hyzy,
Chief Investment Officer,
Merrill and Bank of America Private Bank
What should investors consider right now?
With volatility unlikely to abate soon, investors can look for ways to remove risk from their portfolios, Hyzy suggests. While the CIO's opinion continues to be a slight overweight to stocks versus bonds, investors might consider a higher proportion of so-called defensive stocks (those that tend to perform better amid turbulence) such as health care and utilities, and a decrease in more vulnerable sectors such as technology, industrials, consumer discretionary and communication services, Hyzy says. "Investors might also consider incrementally lowering their exposure to European equities, given the uncertainties surrounding the Russia-Ukraine war."
As interest rates — for years stuck near zero — continue to rise, bonds may be worth a closer look, he adds. "The yield for two-year bonds is almost double the current equity yield of the S&P 500," Hyzy says. "For some investors, bonds are becoming attractive again."
Yet beyond those specific ideas, "Diversification and a long-term perspective continue to be the top priorities," Hyzy says. Investors should ensure they have a broad mix of assets within and across asset classes and rebalance their portfolios as necessary.
For more timely insights from the Chief Investment Office, tune in to the CIO's Market Update audiocast series.
Footnote 1 The Wall Street Journal, "Dow Declines 1,063 Points in Worst Day Since 2020," May 5, 2022.
April 28, 2022

Navigating today's volatile — but resilient — markets

Seesaw plunges and rebounds in recent days highlight one of the most challenging and unpredictable market environments in recent memory. "It's well known that markets, especially for riskier assets such as stocks, don't like uncertainty," notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "And rising inflation and interest rates, the Russia-Ukraine war, COVID-19 lockdowns in China and other factors have created very high uncertainty," Hyzy says.
On top of those pressures came Thursday's news that U.S. GDP shrank by 1.4% during the first quarter of 2022, the first such setback since early 2020.Footnote 1 Yet even so, the economy remains resilient, Hyzy believes. "Job growth continues at a healthy clip and consumer spending remains vigorous."
In such an unpredictable environment, "Even if near-term trends look treacherous, staying in the market is the most important thing," Hyzy says. "This uncertainty, even in the face of sudden downdrafts, does not change the principles of asset allocation and the benefits of long-term investing and diversification," he notes in "Uncertainty at Its Highest (PDF)," a new Investment Insights report from the Chief Investment Office. Here, Hyzy offers insights and steps investors could consider.
Wanted: a turning point on inflation
"Choppy markets are likely to continue until signs emerge that inflation has peaked, which we expect may happen in the second half of the year," Hyzy says. To counter inflation, the Federal Reserve (the Fed) has sharply reversed its accommodative policies of near-zero interest rates and is likely to raise rates multiple times in the months to come. Still, the economy risks stagflation (a combination of rising prices and a stagnating economy) if the Fed's efforts are unsuccessful; and, while Hyzy believes recession is unlikely this year, that, too, remains a risk.
For those reasons, investors may want to strengthen their portfolios against two forces at work today: volatility and inflation. "This is a new market regime that may require some adjustments to your portfolio," Hyzy notes.
Seeking quality and potential inflation protection
Because volatility is inherently unpredictable, investors should ensure that their portfolios are well diversified, both within and across different asset classes, Hyzy says. "Market gyrations in the coming weeks could provide opportunities to become even more balanced in your portfolio."
High-quality investments also tend to hold up better during periods of elevated volatility. "That means large, well-run companies with strong balance sheets, healthy cash flow and consistent dividend growth," he adds.
To help protect your portfolio against inflation, you might consider industries that are able to pass along higher prices to their customers, Hyzy suggests. "We also continue to emphasize areas such as energy, and U.S. equities relative to the rest of the world." Investors may also want to consider the financial sector, which typically benefits when interest rates are rising.
Adding some real assets, such as commodities or real estate, could also be considered, since these assets tend to rise with inflation, Hyzy notes. And for bond investors, "We are beginning to witness some attractive yield levels."
The virtues of a long-term view
Any decisions should be made in the context of your personal, long-term investing goals, Hyzy notes, adding that buying or selling out of fear or in hopes of timing the market are never good strategies. Investors may also be wise to avoid obsessively following the daily ups and downs, Hyzy adds. "The best approach is to stay invested and let the latest market challenges work themselves out over time."
The best approach is to stay invested and let the latest market challenges work themselves out over time.
— Chris Hyzy,
Chief Investment Officer,
Merrill and Bank of America Private Bank
For more insights, watch "The Big Shift: New Market Forces and Ways to Prepare" and tune in to the CIO's "Market Update" audiocast series.
Footnote 1 The Wall Street Journal, "U.S. GDP Falls 1.4% as Economy Shrinks for First Time Since Early in Pandemic," April 28, 2022.
March 22, 2022

Update: Market volatility and the Russia-Ukraine conflict

Join Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, as he checks back in with Ian Bremmer, President of Eurasia Group and GZERO Media, on the latest developments in the crisis and progress toward a possible resolution. Hyzy also discusses the market impacts of the conflict with Michael Hartnett, Chief Investment Strategist, BofA Global Research, in this program recorded on March 21. Catch up with Hyzy's earlier conversation with Ian Bremmer in the previous post below.
Special guest:
  • Ian Bremmer, President of Eurasia Group and GZERO Media
Expert panelists:
  • Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank
  • Michael Hartnett, Chief Investment Strategist, BofA Global Research
March 8, 2022

Market volatility and the Russia-Ukraine conflict

Watch Ian Bremmer, President of Eurasia Group and GZERO Media, and a panel of experts address the current geopolitical situation. Ian provides his perspectives on the geopolitical implications of the conflict as tensions continue to rise. Then the panelists discuss the impact on oil prices, inflation, the economy and investment markets — and share their views on how investors can remain calm and focused on their goals at this difficult time.
Expert panelists:
  • Ethan Harris, Head of Global Economics, BofA Global Research
  • Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank
  • Savita Subramanian, Head of U.S. Equity & Quantitative Strategy and Head of ESG Research, BofA Global Research
February 28, 2022

Ukraine invasion: Should investors retreat to the sidelines?

While first and foremost a humanitarian crisis, Russia's invasion of Ukraine adds another major disruption to investment markets already buffeted by inflation, potential Federal Reserve (Fed) interest rate hikes and persistent pandemic concerns. "The terrible situation in Ukraine is likely to keep many investors on the sidelines until there is some clarity on the immediate future," says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. But a better approach may be staying invested and focused on your long-term goals, he adds.
"The S&P 500 has fallen into correction territory, with a loss of over 10% year-to-date, and the Nasdaq 100 Index reached bear market territory," Hyzy says. However, markets rallied somewhat in the immediate aftermath of Thursday's invasion. Such severe disruptions do not signal the end of the current economic growth cycle, he believes. "Corporate balance sheets and individual savings remain healthy, and as the pandemic subsides, another major wave of innovations is just beginning."
A new Chief Investment Office Investment Insights report, "Uncertainty at Its Highest Level, but the Repricing of Risk Is in Its Final Stages (PDF)," offers insights on how investors can manage through short-term volatility and what it may take to help calm the markets.
How volatile for how long?
Further volatility is likely in the weeks to come — much depends on the fluid and hard-to-predict situation in Ukraine. The first big step on the path to steadier market conditions in 2022 will come when the military crisis, however it unfolds, stops escalating, Hyzy notes. "We also need to see a full reopening of the U.S. and European economies as pandemic restrictions ease," he adds. This could spur other key improvements, such as stabilization of oil prices.
Another key to calming the markets is how the Fed addresses rising inflation. Will it maintain a "diligent but measured" approach to raising interest rates and tightening the money supply without choking off the recovery? "This may seem like a lot to ask," Hyzy says. "But these catalysts can work together, creating a chain reaction." If that happens, markets could "grind higher" for the rest of the year.
What should investors consider now?
As events unfold, "investors should focus on diversifying their portfolios across and within asset classes," Hyzy suggests. When rebalancing their portfolios, they may find opportunities to add stocks of well-established, profitable companies with solid balance sheets and attractive valuations.
'Investors should focus on diversifying their portfolios across and within asset classes, says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.
Promising sectors may include energy, materials and financials, as well as large, well-established technology and industrial companies with substantial free cash flow. "More defensive sectors, such as healthcare, are likely to provide some growth and stability," Hyzy notes. "We also believe areas such as travel, leisure and entertainment are attractive, given our view of a full reopening of the economy in the coming weeks and months." It's always a good idea to review your time lines, risk tolerance and liquidity needs when considering your investment decisions, Hyzy adds.
For latest insights on this evolving situation, tune in to the CIO Market Update Audiocast Series.
February 24, 2022

Russia invades Ukraine: What investors need to know

Russia's sweeping attack on Ukraine this week confirmed many observers' fears over the escalating crisis and left the world wondering what will happen next. Political and diplomatic circles regrouped, and markets reacted to the heightened uncertainty. On the first day of the attack, oil prices spiked to over $100 per barrelFootnote 1 and U.S. and global stock markets dropped.Footnote 2
For those watching from afar, the economic news drives home how quickly global events can hit home in today's world. Amid deep concern for those directly engulfed in the crisis, individual investors may wonder whether and what steps to take to protect their finances. At times like these, it's especially important to keep the potential economic and market impacts in perspective, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Stay the course
"History tells us that geopolitical risk is rarely a reason to change your long-term asset allocation strategy," Hyzy says. For one thing, despite rising oil prices, the U.S. economy is far less dependent on Russian energy than are other regions, particularly Europe. The United States is a major energy producer in its own right, and the current economy should be strong enough to endure temporary volatility, he notes.
'History tells us that geopolitical risk is rarely a reason to change your long-term asset allocation' says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.
Moreover, for all of its size and military power, Russia's ability to affect non-energy financial markets is limited. A recent Investment Insights report from the CIO, "Russia/Ukraine Market Update (PDF)," notes the Russian economy ranks 11th in the world and its nominal GDP of $1.7 trillion in 2021 was slightly smaller than that of the New York metropolitan area. All of which suggests a strategy of sticking to one's long-term investment goals rather than buying or selling out of fear.
Diversify
At the same time, it's important to prepare for short-term volatility whose severity may be difficult or impossible to predict as the conflict progresses. Now may be a good time to review your portfolio to ensure proper balance, with a broad mix of investments across and within different asset classes. "Diversification — which people often talk about, but don't always practice — is what's needed most right now," Hyzy says.
Diversification — which people often talk about, but don't always practice — is what's needed most right now.
— Chris Hyzy,
Chief Investment Officer,
Merrill and Bank of America Private Bank
Current conditions generally favor value stocks — good companies whose stock may be undervalued — and investors may want to look at sectors such as defense or energy. Those with short investment time horizons — say, two years or less — may want to consider owning a higher proportion of high-quality U.S. companies, compared to non-U.S. and reducing their allocation to riskier assets, he says.
Invest for the long term
For investors with a time horizon of five years or more, current volatility may offer a chance to strategically add investments at attractive prices. "We suggest that long-term investors buy into this weakness and continue to do that over time, with the idea that the current profit cycle is alive and well," Hyzy says. "Five years from now, that cycle is likely to be even higher, with returns that benefit somebody who invests right now."
Footnote 1 MarketWatch, "Oil prices touch highs above $100 amid Russian airstrikes in Ukraine's Kyiv," Feb. 24, 2022.

Footnote 2 CNN, "Global stocks plunge as Russia attacks Ukraine," Feb. 24, 2022.

Diversification does not ensure a profit or protect against loss in declining markets.
February 16, 2022

Start planning now to help lower your 2022 tax bill

It's tempting to put off thinking about next year's tax returns until December — especially now that the Build Back Better (BBB) Act and its proposed tax changes are stalled in Congress. But there are still compelling reasons to consider your 2022 bill even as you focus on your 2021 returns. "In some ways, tax planning at the beginning of the year may be even more important than year-end planning," says Mitchell Drossman, head of National Wealth Strategies in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. A recent CIO Tax Alert, "Beginning of Year Tax Planning (PDF)," details some points to consider with your tax specialist. Here are just a few highlights.
In some ways, tax planning at the beginning of the year may be even more important than year-end planning. Mitchell Drossman, head of National Wealth Strategies, Chief Investment Office, Merrill and Bank of America Private Bank
Projecting your income
Instead of tabulating what you earned after the fact, "assessing your income at the start of the year could help you make better, better-informed decisions," Drossman notes. Say, for example, you expect a sizable pay raise or increase in investment income this year. That added income could move you to a higher tax bracket, and if you own a small business, it could phase out your ability to claim a qualified business income deduction (QBI). "Running tax projection scenarios at the beginning of each tax year, with periodic updates, can help you avoid surprises and make timely adjustments," says Drossman. You could, for example, move more of your assets into tax-exempt investments early in the year if you expect additional income that could move you into a higher tax bracket.
Anticipating potential tax changes
While the Build Back Better Act, containing an array of potential tax increases for high net worth individuals, stalled in Congress in December, the administration is likely to push for revised legislation for Congress to consider going forward. This legislation would likely retain a variety of potential tax changes while scaling down some spending provisions, Drossman notes. One possibility: A BBB measure ending "back door" conversions of after-tax funds in an IRA or 401(k) into a Roth IRA or Roth 401(k), where earnings can grow tax-free. "While potential tax changes remain uncertain, taxpayers planning such Roth conversions may want to consider doing so early on to take advantage of current rules," Drossman says.
Funding your retirement plan
If you anticipate that investment markets will perform well this year, you might consider funding your 401(k) or IRA early in 2022 rather than incrementally throughout the year. "In a rising market environment, your contributions could have more months to potentially grow and compound tax deferred," Drossman says. One possible exception: If your 401(k) includes an employer match, "you should consider the implications of fully funding your account early in the year," he cautions. "In some instances, when your contributions stop, so will the company's match."
For more insights on these and other tax strategies, be sure to speak with your tax specialist, who can help you make decisions that are suitable for your personal situation.
February 9, 2022

A shifting landscape for bonds as interest rates rise

For bond investors, rising interest rates, global monetary policy and uncertainty over taxes create a shifting landscape for 2022, says Matthew Diczok, head of fixed income strategy, Chief Investment Office (CIO), Merrill and Bank of America Private Bank. A Fixed Income Strategy report from the CIO, "Global Monetary Policy and U.S. Fiscal Policy (Build Back Better) (PDF)," offers insights on what could be ahead for fixed income and how you can manage through the uncertainty.
With the Fed expected to raise rates several times in 2022, clients should focus on the overall yield offered by a portfolio says Matthew Diczok, head of fixed income strategy, Chief Investment Office, Merrill and Bank of America Private Bank.
Fixed income in a rising-rate world
To counter inflation, the Federal Reserve (Fed) is expected to raise rates multiple times this year, starting in March, and the Bank of England has already done so twice. Yet central banks in Europe and Japan have been reluctant to follow suit as their economies continue to recover from the pandemic. When interest rates rise, bond yields follow. Given the interconnected nature of the global economy, investors should expect bond yields to climb, but only so high. "It may be difficult for 10-year U.S. Treasury rates to go substantially above 3% without similar actions by other major central banks," Diczok says.
Taxes and municipal bonds
Last year, "the expectation of higher taxes sparked record flows into municipal bond mutual funds and exchange traded funds," since muni income is free from federal and, in many cases, state and local taxes, Diczok says. Yet the $3.5 trillion Build Back Better Act, which would have increased taxes for many affluent Americans, stalled in the U.S. Senate last December. "A scaled-down version will likely be introduced this year, but passage remains uncertain."
What you can consider doing
Based on these and other developments, Diczok and the CIO provide the following insights for bond investors:
  • Don't count munis out. With the tax picture in flux, municipal bonds in 2022 are unlikely to match last year's torrid pace. Still, state and local tax revenues and pension fund levels have risen, and a separate piece of legislation, the Infrastructure Investment and Jobs Act, provided more than $1 trillion for municipal projects. "We believe municipal bonds will continue to provide value for tax-sensitive investors," Diczok says.
  • Focus on the overall yield of your bond portfolio. Bond prices tend to fall as interest rates rise, but "investors with the ability and willingness to hold during periods of price volatility can be relatively sanguine about market price moves related solely to interest rates and not actual credit issues," Diczok notes. "With the Fed expected to raise rates several times in 2022, investors should focus on the overall yield offered by a portfolio," he adds.
  • Corporate bonds are worth a look. Compared with Treasurys, corporate bonds typically offer higher interest in exchange for higher risk, he adds. "Given the Fed's commitment to markets and improving fundamentals, corporate bonds should provide modest positive excess return over the medium term," Diczok believes.
  • Treasurys provide diversification. Whatever the economic conditions, "bonds are essential in providing portfolio diversification, income and stability," Diczok says. "We recommend maintaining some Treasurys for liquidity and principal preservation."

Next steps

Important Disclosures

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Opinions are as of the date of these articles and are subject to change.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

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The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate 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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