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The Reset Period: Navigating the next 9 months
The Reset Period: Navigating the next 9 months
Please read important information at the end of this program. Recorded on 11-21-2022
The economy is working through historic challenges to a time of renewed stability and eventually a growth path led by new catalysts. This reset period requires investors to be patient, but you don’t have to sit still.
Chief Investment Officer
Merrill and Bank of America Private Bank
Hello, I’m Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
I’d like to share some steps you can consider to help you manage what we believe may be another six to nine months of volatility — and to prepare for a new and better economic cycle ahead.
Getting to a new economic cycle
· Sharp decline in inflation
· Pause in interest rate increases
· Labor market has peaked
· Corporate earnings stabilize
· U.S. dollar weakens
To get there, we’ll need to see a sharp decline in inflation, prompting the Federal Reserve to pause its rapid interest rate increases and focus on both inflation and growth. We’ll look for signs that the labor market has peaked, that corporate earnings estimates have stabilized, and that the U.S. dollar is weakening — all of which in our opinion will lead to a new bull market phase.
Meanwhile, we currently see a number of bright spots and potential opportunities amid today’s challenges.
Bright spots amid the challenges
· Stock valuations are more attractive
· Income opportunities in bonds
· Favorable time for long-term investors
Stock valuations, while not cheap, have become more attractive. Rising rates have created income opportunities in bonds, including short-term fixed income. And even pessimism has a bright side. Rock-bottom investor sentiment creates a favorable time for those with a long investment horizon.
So, how can you position your portfolio? The conversation starts with your personal investment style, risk tolerance and goals.
Say that you’re concerned mainly about generating income.
U.S. Treasurys are currently providing yields
that are competitive with other investments
The good news is that for the first time in more than a decade, U.S. Treasurys are currently providing yields that are attractive and competitive with other investments – especially relative to the dividend yield of the broader equity markets.
And keep in mind that while bond prices drop as interest rates rise, the principal value doesn’t necessarily drop. So, disciplined investors should consider staying the course through volatility and explore quality bonds …
Consider quality bonds:
· U.S. Treasurys
· High-rated agency Mortgage-Backed Securities
· Municipal bonds
· Investment-grade corporate bonds
… such as Treasurys, highly rated agency Mortgage-Backed Securities, municipals and investment-grade corporate bonds. Stocks, while higher risk, may also provide dividend income, especially in sectors such as utilities and energy.
Or, let’s say income is not as much of a factor and you’re looking for long-term growth.
Investment managers are finding value in
companies with solid fundamentals.
As volatility prompts short-term investors to divest from sectors that are currently out of favor, investment managers are now finding relative bargains in companies with solid fundamentals — companies poised to rebound when the reset period is over.
Consider opportunities in themes:
· Climate change mitigation
· Clean energy
From a thematic perspective, that could mean opportunities in digitization and automation, infrastructure, climate change mitigation and clean energy, among others.
For many investors, the biggest question is how to stay balanced and diversified.
Stay balanced and diversified
Start with a mix of stocks and bonds appropriate
for your risk tolerance and stage of life.
That starts with a mix of stocks and bonds appropriate for your risk tolerance and stage of life.
Within stocks, you can further diversify with small- and large-cap, growth and value, and international stocks. And bond investors should consider government, investment-grade corporate and international bonds.
Consider high-quality investments and
defensive areas of the market.
At this time, we also suggest leaning toward higher-quality investments and defensive areas such as healthcare and utilities, which tend to do well amid volatility and prior to a pivot by the Federal Reserve back to easier financial conditions.
While the precise timing is elusive, we expect the economy to fully work through the reset by mid to late 2023. Check back frequently for updates on the latest developments. And speak with your advisor about how to best to position your portfolio for the days ahead.
Thanks very much.
The opinions expressed are as of the date of this video and are subject to change.
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Find out why we believe the future is bullish with insights on where we’ve been and where we might be headed.
Chris Hyzy: This is Chris Hyzy, Chief Investment Officer, for the market update for November 14th titled: The Market’s Dilemma. So, what is the dilemma? Rising prices mixed with falling earnings. This is the last shoe to drop in our opinion as it relates to the final bottoming process in the markets. We still have some time to go. We still have some so-called trends to analyze as it relates to the broader economic environment and capital market environment, but as of right now the market’s dilemma continues to be rising prices with falling earnings. This is the third big rally of the year. The last two rallies were followed by big drawdowns. This next rally that we are witnessing right now could come with a smaller drawdown in our opinion and here’s why. Last week’s strong rally was the strongest one since June of 2022 this year and with the market about 12% off its lows, there are still questions out there as to, “Why this latest strong rally?” and, “Is it sustainable?” From the standpoint of, “Why this latest rally?” it’s pretty simple. There are four predominant reasons. Number one, The Wedge. We’ve talked about the wedge before. The wedge being inflation. It is squarely in between headwinds and tailwinds and right now that wedge has been lifted somewhat. Inflation came in last week for October - the Consumer Price index, which still is backward looking, but did show a lot of promise - it came in below consensus for October. It had a much slower growth rate than what was expected. So, the viewpoint for last week took off that inflation has indeed peaked. We don’t want to call the actual peak just yet however we are encouraged by the decelerating trend. Number two, two-year yields did peak out at 4.7% and fell all the way down to about 4.2%. another 50 basis points or so just on one week and are now hovering around 4.3%. In terms of the dollar - the other area that we look for over the past few months - the dollar turned very much weaker as well, indicating a little bit of risk on overseas, but yet we are just more encouraged by the stability of the dollar and the fact that it hasn’t continued to strengthen at least for last week. Last but not least, strong seasonal and midterm election patterns are a tailwind for the market. Shifting over to the other side, there were also other tailwinds that we needed to see happen outside of inflation just peaking out and that happens to be the energy equation over in Europe which looks a little bit more promising than what many of the bear camps believed to be heading into the winter season and that has relaxed the overall concern at this point over in Europe. Then some rumblings coming out of the war in Ukraine that there may be some willingness or at least movement towards some level of negotiations in the coming weeks. We will see how that happens overall. Again, the weaker dollar, the two-year yields peeking out, the wedge of inflation lifting somewhat. We need to see it come fully out before we can call full bottom to this market but we do see stability continuing around the corner. As it relates to economic and risk taking headwinds, they still remain so we believe we are still in a long range type of reset workout prices where we can get strong rallies and in the future smaller pullbacks, but overall greater stability as we head towards next year. First quarter of next year we still feel few rate lift offs. Perhaps now a little bit less than what the Fed has originally indicated given where inflation’s going and the big surprise for next year, at least in our opinion right now, could be how far inflation does fall. For now, we expect some pretty strong dollar cost averaging opportunities between now and the end of the first quarter and we would look for those opportunities for those who are still significantly underweight equities. For now, bonds seem to be the area of choice relative to equities, but we believe a diversified portfolio over the course of the next year plus and over the course of the next two to five years we expect strong equity positioning overall. That’ll do it for today. Thanks for listening.
Operator: Please the important disclosures provided on this page.
In this episode of the audio series, get insights directly from the CIO on market volatility, and why it might be here for some time.
Investing involves risk. There is always the potential of losing money when you invest in securities. Past performance does not guarantee future results. Asset allocation, rebalancing and diversification do not guarantee against risk in broadly declining markets.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary.
This material does not take into account a client’s particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer, or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your Merrill financial advisor.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.
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