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Market Volatility

August 14, 2019

Bond Market Signals Recession Concerns

So, what just happened?
DURING AN ALREADY VOLATILE WEEK, markets plummeted on Wednesday in response to heightened concerns about slowing global growth. Of particular concern was the inverted yield curve—when longer-term interest rates are lower than short-term rates—a condition that has historically signaled the possibility of recession. A portion of the Treasury yield curve inverted, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, while the yield on the 30-year Treasury bond fell to its lowest level ever. “Disappointing economic data out of Germany and China, rising tensions in Hong Kong, and the lack of clarity in both the Italian political situation and the Brexit end game added to investor concerns,” he adds.

“While the probability has increased, we believe the United States can avoid a recession in the next 12 months.”

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Here’s our take on what this means.
“While the probability of a recession has increased, we believe the United States can avoid a recession in the next 12 months,” Hyzy says. He points to the strength of the U.S. consumer, a still-healthy jobs market, and the potential for the Fed to be more assertive with its monetary policy through the remainder of the year. “We will be watching credit markets for further signs of stress and unemployment claims for any signs that business confidence is waning,” he adds.

What should investors do right now?
“We remain cautiously optimistic on the broader markets,” Hyzy says. Investors may want to let the volatility subside, and then consider adding higher quality and higher yield stocks, including utilities and consumer staples. Medium and longer term Investors should consider a diversified mix of growth and value stocks, including industrials, healthcare, technology, and financials, Hyzy believes. “Lastly, we still emphasize U.S. equities relative to the rest of the world, given the strong consumer and our view that we are still in the early stages of a very long innovation cycle.”

For more timely insights, listen to Chris Hyzy’s commentary in this audiocast, Market Update: Letting the Dust Settle in High-Emotion Markets. Read Learning the Curve from the Chief Investment Office to find out more about what the yield curve has been telling us lately about the markets and the economy.

Information is as of 08/14/19
Investing involves risk, including the possible loss of principal.
Opinions are those of the author and are subject to change.
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.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments
Investments in foreign securities 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.

August 6, 2019

Trade Tensions Rattle Markets, But Fundamentals Remain Strong

So, what just happened?
THE DOW JONES INDUSTRIAL AVERAGE plunged 767 points on Monday 1 in response to new rounds of trade hostilities between the United States and China. U.S. stock futures showed signs of recovery early Tuesday. 2 However, “until the world’s two largest economies settle their differences, investors need to brace for episodic bouts of trade volatility,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

What precipitated the massive sell-off? President Trump last week announced 10% tariffs on $300 billion of Chinese goods starting September 1. “These tariffs, if implemented, would be the first to target consumer goods, and could open a whole new front in the U.S.-China trade war,” says Hyzy. The Chinese government retaliated by devaluing its yuan (a move that decreases the price of exports and increases the price of imports) and ordered state-owned companies to suspend U.S. agricultural imports. The U.S. responded by declaring China a currency manipulator. 3 For investors, the measures at least temporarily offset the good news of last week’s Federal Reserve interest rate cut. Yet over the long-term, Hyzy says, monetary policies and U.S. economic and market fundamentals offer strong signs of encouragement.

Graphic for an American flag on the left side and a Chinese flag on the right side

"We believe investors should allow markets to settle down for now, but be ready to consider strategic stock investments, where appropriate, the closer we get to the next Federal Reserve meeting."

Chris Hyzy Chief Investment Officer for Merrill and Bank of America Private Bank

Here’s our take on what this means.
These heightened tensions brought the trade truce to an abrupt end and may in the near term result in waning business confidence and a pull back by investors. But there are reasons for optimism. Among them: better-than-expected U.S. corporate earnings, consumer-driven growth in U.S. GDP, and capital expenditures by companies experiencing productivity gains. 

Another positive is the ongoing policy of easing by global central banks, as evidenced by the Fed’s rate cut of 25 basis points last week. “Our partners in BofA Merrill Lynch Global Research Economics continue to believe the Fed will cut a cumulative 75 basis points, with the next cuts in September and October,” Hyzy notes. Such measures by the Fed and other central banks are aimed at preventing deflation and possible recession as many economies outside the U.S. continue to struggle. More aggressive actions may be needed the longer the Fed waits to adjust policy more sharply and quicker.

What should investors do right now?
“We believe investors should allow markets to settle down for now,” says Hyzy, “but be ready to consider strategic stock investments, where appropriate, the closer we get to the next Federal Reserve meeting” on September 17-18. If anything, the latest trade battles could create buying opportunities as stocks experience “a small reset back to more attractive levels,” he adds.

As for which stocks to consider, “We continue to prefer the U.S. versus the rest of the world, and large-cap versus small-cap companies,” Hyzy says. Investors should consider a balanced mix of value and growth stocks offering yields of 2% or better and double-digit earnings growth.  Attractive sectors include technology, industrials, healthcare, and financial services. High-quality, short-duration government bonds can help offset risks associated with equities, Hyzy adds.

For more insights on the latest trade volatility, listen to Chris Hyzy’s commentary in this audiocast and read Market Update: One Hand Washes the Other from the Chief Investment Office.

1 https://www.cnn.com/2019/08/05/investing/dow-stock-market-today/index.html
2 https://www.marketwatch.com/story/us-stock-futures-sink-suggesting-more-steep-losses-on-tuesday-2019-08-05
3 https://www.nytimes.com/2019/08/05/business/economy/us-china-yuan-renminbi-trump.html?action=click&module=Top%20Stories&pgtype=Homepage

Information is as of 08/06/19
Investing involves risk, including the possible loss of principal.
Opinions are those of the author and are subject to change.
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.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments
Investments in foreign securities 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.

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