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When Could the Markets Recover? 5 Signs to Watch


April 8, 2020


BEFORE THE MARKETS CAN RECOVER from the massive downturn created by the coronavirus, they need to “find a bottom,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That process is already well underway, he adds, with significant progress being made on three of five fronts. “We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.”


Of course, everything still depends on finding answers to the health crisis that continues to threaten the lives of millions across the world, Hyzy adds. And considering the number of jobs lost and businesses shuttered, recovery will be slow, with GDP growth unlikely to return until 2021.


Below, Hyzy offers a progress report on the signs the CIO is watching that may indicate the markets may be reaching their bottom and could turn the corner towards recovery.


“We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Sign #1: Capital flows more freely. Amid a wave of panic selling by investors in March, the Federal Reserve (Fed) promised to buy unlimited amounts of government debt and lend money to local governments and businesses to help keep capital markets from drying up. Such policies appear to be working, Hyzy says. “Capital is flowing more freely and fixed income markets are acting in a more stable manner, even as we speak.”
✔ Status: Underway


Sign #2: Stock-bond relationship normalizes. In normal market conditions, bond prices tend to rise as stock prices fall, and vice versa, so having both in a portfolio helps mitigate risk. In March, bonds and stocks dropped in tandem as investors sold them in search of cash. With stimulus helping to stabilize bond markets, the inverse relationship between stocks and bonds is returning—a key sign of market stability, Hyzy says.
✔ Status: Underway


Sign #3: Volatility eases. “Market volatility went above 80 in mid-March, the highest on record,” Hyzy says—as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The March 16 closing of 82.69 was higher even than the 80.86 level in November 2008, at the onset of the financial crisis.1 “Currently, the VIX has fallen below 50,” Hyzy notes. “More importantly, it has fallen on days when markets are down.”
✔ Status: Underway


Sign #4: U.S. dollar weakens. Amid a global scramble for less risky currencies, the dollar has shot up in value during the current virus crisis. “This can hurt the economies and finances of emerging market countries, given their high exposure to U.S. debt, and delay the eventual recovery overseas,” Hyzy says. “Though there are signs the dollar may be cresting, we need to see some consistent weakening.”
✔ Status: Needs improvement


Sign #5: Bad news is taken in stride. One crucial sign of stability is when markets have already factored in the effects of the coronavirus on the economy and can absorb daily developments without panicking, Hyzy believes. “We’ve seen this sporadically, but it needs to be more consistent.”
✔ Status: Needs improvement


What can investors consider doing now?
The recovery, when it comes, will likely reveal an economy forever changed, Hyzy notes. We’ll see a world focused on localization rather than globalization, where technology and remote work take precedence. “It’s going to be ‘e-Everything,’ from our perspective—e-Learning, e-Medical, e-Sports, e-Social interaction and e-Work,” he says.


In the meantime, as the economy and markets find bottom, “quality, yield and growth are three factors to continue to emphasize,” Hyzy says. That may include stock and bond investments in large, well-run U.S. companies, he adds.


1 “VIX Index Historical data,” CBOE Volatility Index


Information is as of 04/08/2020


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


Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.


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


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.


Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.


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