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. 

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Chris Hyzy

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.

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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.

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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.

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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 …

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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.

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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. 

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Consider opportunities in themes:

·         Digitization

·         Automation

·         Infrastructure

·         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.

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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.

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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.

Important Disclosures

The opinions expressed are as of the date of this video and are subject to change.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results. It is not possible to invest in an index.

All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.

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