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What’s Behind the Markets’ Optimistic Outlook?

 

May 29,2020

 

THOUGH THE INITIAL CORONAVIRUS SHOCK plunged markets, businesses and people’s lives into disarray, recent market performance seems to be discounting the effect. In recent weeks, financial markets have rallied, even amid widespread unemployment and fears over business bankruptcies. On Wednesday, the Dow Jones Industrial Average (DJIA) closed above 25,000, a level not seen since early March.1

 

“Large institutional investors have transitioned from fear of being in the markets to fear of missing out.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

The recent upward trend in the DJIA is a sign of underlying confidence that, once the deep economic uncertainties have been worked out, a stronger U.S. economy will emerge, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Right now, it’s a tale of two economies,” he adds. While some industries are rebounding or even growing, for others the future remains uncertain. “The Great Convergence,” a new Investment Insights report from the Chief Investment Office (CIO), describes how and when the recovery process could likely unfold and what portfolio strategy should be considered.

 

What’s behind the markets’ recent confidence?
Markets have been supporting an optimistic outlook in part because they have already written off the ravages of 2020 as a “pass-through year,” Hyzy says. Adding to their market confidence is unprecedented stimulus efforts by Congress and the Federal Reserve, with more potentially on the way. Amid signs that the U.S. economy, despite its challenges, appears better prepared for recovery than much of the rest of the world, “large institutional investors have transitioned from fear of being in the markets to fear of missing out,” he believes. And while the risks of market setbacks remain, they may increasingly view dips as an opportunity to add to their positions, rather than exit markets altogether.

 

Expect not one but several recoveries
The overall economy is still in a transition phase to a recovery that could start in the third quarter and gain momentum in 2021. But it won’t be easy, or uniform. “As the country re-opens, we expect various types of recoveries to unfold,” Hyzy says. “While areas such as technology and healthcare seem poised for resilience and growth, challenged sectors such as airlines and automobiles will recover to differing degrees.” Assuming an end to the health crisis, a new, post-coronavirus economy will likely take shape starting in 2022, Hyzy believes—one that emphasizes technology, healthcare, e-learning, e-entertainment and local rather than global supply chains.

 

What can investors consider for the days ahead?
“With volatility likely to remain for the foreseeable future, investors may want to review their portfolios more frequently,” Hyzy says, adding that rebalancing and dollar cost averaging—which stretches asset purchases over time, thus potentially reducing the effects of volatility—can help them stay focused on underlying goals. When considering stocks, investors should favor the U.S. versus the rest of the world and large companies versus smaller ones for the foreseeable future, he believes. And at a time of extremely low interest rates, investment grade corporate bonds may offer better income potential (though with higher risks) than U.S. Treasuries.

1“Dow Climbs Above 25000 as Optimism Builds,” The Wall Street Journal, May 27, 2020

 

Information is as of 05/29/2020

 

Opinions are those of the author(s), as of the date of this document and are subject to change.

 

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

 

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.

 

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, rebalancing and dollar-cost-averaging do not ensure a profit or protect against loss in declining markets.

 

Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss in declining markets. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.

 

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

 

Small cap and mid cap companies pose special risks, including possible illiquidity and greater price volatility than funds consisting of larger, more established companies.

 

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

 

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.

 

Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.

 

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

 

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