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What Will It Take to Stem the Volatility?

March 18, 2020


Investors should expect sharp ups and downs in the markets until coordinated health policies begin to turn the tide on the coronavirus, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Whereas other financial crises have been addressed by fiscal and monetary policy alone, “this time, investor confidence depends first on answers to biological questions, such as how deep the health crisis will become and when the virus will be contained,” Hyzy says.


A new Chief Investment Office report, “The Process Begins,” suggests that coordinated health, fiscal and monetary policies in the United States and globally will be needed so that markets and the economy can find a firm floor on which to build a recovery.


Image of quote that reads "we believe long-term investors should consider rebalancing their portfolios to stay in line with their underlying strategies" by Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank


Where do things stand now?
The “bottoming out” process will likely involve two phases, Hyzy suggests: First, when markets gain confidence that policies are working. Second, when they start to assess the impact on corporate earnings and the economy.


One bright spot: compared with the financial crisis of 2008, the U.S. economy was in a stronger position when the virus outbreak occurred. “In 2008, there were much more daunting questions encircling the financial system, and the consumer was not on solid footing,” Hyzy says.


Yet given the many unknowns and the magnitude of the challenge, with S&P 500 asset values down 30% so far, these questions may take weeks or even months to resolve, Hyzy says. And financial estimates are likely to change frequently as the crisis evolves.


How are policymakers responding?
One of the biggest challenges for health officials right now is learning the effect that “social distancing” and other containment policies currently being enacted state by state and locality by locality are having in slowing the spread of the virus, Hyzy says. Better data and more coordinated policies will help from both a health and economic perspective, he believes. “Knowing how long people will have to stay home will help determine how consumers and businesses will manage through the crisis as well as the depth of any economic contraction.”


Clearer health information can in turn help sharpen fiscal policies (such as government spending or tax relief) and monetary policies (such as the Federal Reserve’s interest rate cuts and lending programs) aimed at stimulating the economy, Hyzy believes. “This is already happening, but more is needed.”


What can investors consider doing?
Such conditions call for patience and avoiding giving in to panic. “We believe long-term investors should consider rebalancing their portfolios back to stay in line with their underlying strategies,” Hyzy says.


Current conditions favor high-quality investments across and within asset classes, including large U.S. companies whose dividends may help compensate for the reduced income potential of bonds, Hyzy notes. Bonds remain important to help mitigate risk in a portfolio. He adds, “Maintaining a well-diversified portfolio while rebalancing over time is vital to investing towards your goals.”


Information is as of 03/18/2020


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


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.”).


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


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.


Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.


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. 


Dividend payments are not guaranteed, and are paid only when declared by an issuer’s board of directors. The amount of a dividend payment, if any, can vary over time.




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