Breaking insights on the economy, market volatility, policy changes and geopolitical events
3 reasons to get off the sidelines and invest in equities
DESPITE PERIODIC VOLATILITY — as we saw after higher than anticipated January inflation numbers were released — the equity markets have performed exceptionally well so far this year. The S&P 5001 and the Dow Jones Industrial Average2 hit record highs, and the NASDAQ Composite Index has come close to its all-time high from 2021.3 While that’s good news for investors who already own stocks, those with significant cash on the sidelines may wonder if they’ve missed the boat. So, is getting into the market now too expensive?
That may be the wrong question to ask. “Valuation alone is not a good gauge of which way the market will trend,” says Emily Avioli, investment strategist in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. One thing is certain: “Staying in cash because stocks seem too expensive — or the markets too volatile — could lead to potential missed opportunities,” she adds. Here’s why.
There’s room to grow. Markets are prone to periodic volatility related to inflation news, geopolitical concerns, presidential elections and more. “Yet we have seen 11 years with new all-time highs since the current secular bull market kicked off in 2013,” Avioli says. “And, given our view that it still has room to run, we could see years of new all-time highs ahead.”4
You can still find relative bargains. While S&P 500 stocks are trading at a price-to-earnings (P/E) valuation ratio of about 20.0x — well above the historical average of about 16x — “S&P 500 stocks outside of the mega-cap ‘Magnificent Seven’ companies have a current average P/E ratio of about 18x,” Avioli says. “And beyond the S&P 500, investors may find attractively priced small-cap and value stocks.”
“Consider using any near-term volatility as an opportunity to add to equities,” suggests Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Corporate earnings remain healthy, and despite January’s higher than expected Consumer Price Index numbers, the CIO maintains its view that the Federal Reserve will likely begin a measured interest-rate cutting cycle in June or July.”
Cash carries its own risks. While it’s important to maintain some cash in your portfolio, cash typically hasn’t performed as well as stocks over the long term. In any given year, cash has a 24% chance of outperforming stocks, Avioli notes. But since 1979, over stretches of 15 or 20 years, stocks have outperformed cash.5
In the end, while it’s always preferable to pay less rather than more for a stock, valuation is just one factor to consider when you’re investing, Avioli adds. Other factors, including your long-term goals, risk tolerance and time horizon, are essential. “The best approach is to invest steadily in stocks, bonds and cash according to your long-term strategy.”
Learn more about investing in a bull market by reading “Considerations for investing at all-time highs” in the recent Capital Market Outlook from the CIO. And follow up by reviewing “How much is too much cash in your portfolio?”
5 Bloomberg. Data as of January 31, 2024. The market is represented by the S&P 500 Index. Cash is represented by ICE BofA U.S. 3-month Treasury Bill Index. Refers to instances in which cash outperformed Equities over stated holding periods.
New goal: Limiting geopolitical risk in your portfolio
WHILE UKRAINE AND GAZA DOMINATE HEADLINES, they’re just two of more than 180 current regional conflicts, the highest number in 30 years.1 A global landscape marked by such rising tension and uncertainty could affect U.S. and global economies, markets — and investors — for years to come, notes Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.
“Don’t pause investing or diverge from your long-term strategy, but do consider geopolitics along with corporate earnings, valuations and other metrics when making investment decisions,” Quinlan suggests. Watch the “Market Decode” video above for tips on how to incorporate geopolitics into your investment decisions.
For more insights, read “Are the markets really impervious to geopolitical risks?” in the January 8, 2024 Capital Market Outlook, and tune in to the CIO’s Market Update audiocast series for weekly check-ins on the markets and economy.
1 International Institute for Strategic Studies, 2023. Bloomberg, “It’s Not Just Ukraine and Gaza: War is on the Rise Everywhere,” Dec. 10, 2023.
No one can predict the markets, but …
COMING OFF A YEAR WHEN THE S&P 500 rose by 26%,1 inching toward a new record, many investors want to know: Will the markets maintain their momentum in 2024? “Trying to predict the markets is never wise — and that’s particularly true in such an unpredictable investment landscape,” says Joe Quinlan, head of Market Strategy for the Chief Investment Office (CIO) at Merrill and Bank of America Private Bank. But some compelling clues do exist.
A recent Capital Market Outlook report, “10 macro questions for 2024,” written by Quinlan and Lauren Sanfilippo, senior investment strategist for the CIO, features informed insights (and a few qualified predictions) as they answer 10 questions that may be top of mind for you. Here’s a sampling — read the full report for their thoughts on whether all the good news is already priced into the stock market, how close the Fed is to beating inflation, and more.
Will the 2024 U.S. election create volatility — or opportunity?
“Asset prices are determined more by economic fundamentals than by politics,” notes Sanfilippo. “Presidential elections do create market uncertainty, but disruptions are usually temporary.” Volatility will likely depend on what stances the parties take on taxes, immigration, healthcare and other issues, she adds. It’s worth noting, too, that the U.S. isn’t the only country holding a major, potentially consequentical election this year.
What it could mean for investors: “Temporary election volatility may allow long-term investors to strategically add to portfolios at attractive prices,” Sanfilippo says.
What’s the likely impact of geopolitical unrest?
“Amid wars in Europe and the Middle East, shipping lane disruptions, U.S.-China tensions and cybersecurity threats, geopolitical unrest has become a significant variable for investors,” says Quinlan. While these tensions represent one of this year’s major market risks, “quicker-than-expected resolutions to the major global conflicts could be among several potential surprises contributing to market growth this year,” he adds.
What it could mean for investors: The fluid global landscape favors high-quality diversified assets with an emphasis on energy and copper, large defense companies and cyber leaders.
How could artificial intelligence (AI) move markets in 2024?
“AI innovations have been building since late 2022, and companies across industries and sectors have ratcheted up their capital spending,” Sanfilippo says. “While the magnitude and timing of AI’s effect on corporate earnings will vary, in 2024 we should see AI applications spreading to non-tech industries.”
What it could mean for investors: Sectors such as education, healthcare and manufacturing should benefit. But the growing push for regulation of AI could affect its impact on earnings and productivity.
While there’s plenty of room for positivity about the markets and economy, “we remain optimistic — but realistic — about where asset price returns can be in 2024,” concludes Quinlan. For more on the year ahead, watch “Looking toward a new era of growth.”
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1 Bloomberg. Data as of December 2023.
Outlook 2024: Insights on the year ahead
INVESTORS HOPING FOR STEADIER MARKETS in 2024 may get their New Year’s wish. While there will undoubtedly be some volatility along the way, the coming year should be “a time for investors to consider new assets and diversify their portfolios further for what we believe will ultimately be the transition to a new era of growth later in 2024,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
In the Outlook 2024 webcast above, “Looking toward a new era of growth,” Hyzy and analysts from the Chief Investment Office and BofA Global Research provide insights on the markets and economy in 2024 and share ideas for how investors can prepare for the potential opportunities and risks ahead.
For more on what could drive the markets in the coming year, watch “Global elections and the markets: What to expect in 2024” and “How much is too much global debt?” And be sure to read “Outlook 2024: Positioning yourself for future growth.”
Getting comfortable with “higher for longer”
HFL STANDS FOR “HIGHER FOR LONGER,” and it doesn’t just apply to interest rates anymore, says Joe Quinlan, head of CIO Market Strategy. Given the tight labor market, strong wages and elevated energy prices, it’s unlikely rate cuts will come any time soon, Quinlan explains. Markets and investors have pretty much accepted that fact. But the HFL trend also applies to a number of other areas that could affect the markets and your investing decisions. Among them: global energy prices, defense spending and the U.S. deficit.
Watch the video above for what these higher-for-longer trends could mean for your portfolio. For more insights, read “Higher-for-Longer Goes Beyond Interest Rates: What Investors Need to Know” in the October 10, 2023 Capital Market Outlook and tune in to the CIO’s Market Update audiocast series for weekly insights on the markets and economy.
What rising geopolitical risks could mean for your investments
THE CONFLICT IN THE MIDDLE EAST has pushed already-simmering global tensions to their highest level in recent memory. “Geopolitics used to be considered a lower-level financial risk. Now, it may be the top risk,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “In addition to the overriding humanitarian concerns, the terror attack in Israel, the continuing conflict in Ukraine and tension in the Indo-Pacific create a new level of uncertainty and raise urgent questions about the potential impact on the economy and financial markets,” he adds.
In the video above, Hyzy discusses potential impacts on the global oil supply, individual industries and corporate earnings, and suggests steps you might consider now to help maintain progress toward your goals. In the midst of rising geopolitical tension, “stay balanced, think long term, and keep a high level of diversification across and within asset classes,” he says. If you work with an advisor, now might be a good time to reach out for a talk.
For a deeper look at the impact of heightened global risks, read “What rising geopolitical tensions could mean for the markets and economy,” a Q&A with leading analysts across the Chief Investment Office and BofA Global Research. And keep up with our latest insights by tuning in regularly to the CIO Market Update audiocast series.
Welcome tax relief for retirement savers of all ages
IF YOU’RE SAVING FOR RETIREMENT or have an inherited retirement account, the IRS recently announced a few changes that could affect your finances — in a good way. Among them, a SECURE Act 2.0 provision putting an end to pre-tax catch-up contributions for high earners, scheduled to kick in next year, has been postponed, reports the National Wealth Strategies team in the Chief Investment Office (CIO). Other provisions slated for 2024 create new opportunities to save more. And, in 2023, there’s a reprieve on penalties for heirs who neglected to take required minimum distributions (RMDs) from inherited retirement accounts. Below are the highlights.
Contribution rule changes for 2024
For younger savers. The resumption of student loan payments this month could crimp younger investors’ ability to save for retirement. As one possible remedy, starting in 2024, employers will have the option to “match” employee student loan payments with contributions to a retirement account, thanks to SECURE Act 2.0. Also kicking in in 2024, certain unused funds in a 529 education savings plan could be rolled over into a Roth IRA in the beneficiary’s name without Federal income tax or the usual 10% penalty for non-education withdrawals.
For older savers. High-earning savers 50 and over have gotten a two-year reprieve from the SECURE Act 2.0 rule limiting their ability to make catch-up contributions using pre-tax income.
As background, SECURE Act 2.0 had mandated that, starting in 2024, workers earning more than $145,000 in the prior year would have to make their catch-up contributions to a Roth plan, using post-tax rather than pre-tax dollars. Yet due to the complexities of implementing the new rule, the IRS has determined those high earners can continue to make their contributions to traditional retirement plans using pre-tax dollars through 2025.
Penalty relief on RMDs for inherited plans
The IRS’s “10-year rule” for inherited IRAs enables many beneficiaries to take full distribution of an inherited retirement account within a decade, with no required minimum distributions needed in any specific year. However, if the person you inherited a retirement plan from died on or after their “required beginning date” for taking RMDs, you may have to take annual RMDs during that 10-year period. Amid some confusion on the part of beneficiaries, the IRS has determined that those who have overlooked this annual distribution requirement won’t be subject to penalties for 2023. (A previous IRS notice provided relief for 2021 and 2022).
You can learn more about this and other recent RMD changes by reading the recent CIO report, “Tax Alert 2023-04: IRS again provides relief for required minimum distributions for certain beneficiaries.” But keep in mind that these provisions are highly complex, with many variables, so be sure to speak with your tax professional before making decisions. For an overview of key SECURE Act 2.0 provisions, check out “SECURE Act 2.0 offers powerful new ways to save more for retirement.”
What could a government shutdown mean for investors?
RIGHT NOW ALL EYES ARE ON WASHINGTON and whether the necessary discretionary-spending appropriation bills or a stop-gap bill can be signed before midnight on September 30 to avoid a government shutdown. Investors, of course, are wondering what the impact might be on the markets and economy.
Though serious events, shutdowns have historically been less concerning from an economic and market perspective than you may imagine, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. It’s also important to remember that mandatory spending, such as Social Security and Medicare payments, would continue in the event of a shutdown. Watch the video above for more insights and be sure to check back for updates.
You’ll find an interesting chart highlighting the market effect of the last 20 government shutdowns in the September 18, 2023 Capital Market Outlook from the CIO. For more timely market commentary, tune in to the CIO Market Update audiocast series.
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