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Washington Update

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December 18, 2018

What Could a Government Shutdown Mean for Investors?

THE PROSPECT OF A GOVERNMENT SHUTDOWN on Friday adds one more concern for investors during this period of volatility in the markets. “Equity markets are already on edge” over everything from the Federal Reserve’s interest rate plans to U.S.-China trade tensions, notes the Chief Investment Office (CIO) in its Investment Insights: Another Government Shutdown? What It Could Mean for the Economy and Markets?

Yet while government shutdowns can add to short-term volatility and result in furloughs of federal employees, they tend to be short-lived, with little long-term effect on the economy or markets. Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher when it ended.

Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher.

What services would be affected? For the government’s fiscal year ending September 30, 2019, five appropriations bills have already been passed that account for about 75% of government operations, notes the “Investment Insights.” In any case, “mandatory programs like Medicare and Social Security are always maintained, as are other essential functions, such as air traffic control, law enforcement, and security activities.”

For a closer look at the potential for a government shutdown on Friday, read the Chief Investment Office report, “Another Government Shutdown? What It Could Mean for the Economy and the Markets.”

Investing involves risk, including the possible loss of principal.
Past performance is not a guarantee of future results.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

November 8, 2018

Could Divided Government Be Good for the Markets?

WITH DEMOCRATS WINNING THE HOUSE and Republicans holding on to the Senate, what should investors expect from a divided government? “Despite heated rhetoric, gridlock shouldn’t hurt the markets or the current strong economy,” says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust.

In the wake of Tuesday’s election, a new Chief Investment Office report, “Divided Government: Taking Stock of the Midterm Election,” finds reasons for optimism—and even some bipartisan agreement.

The outlook for stocks

“Following midterm elections, presidents often prioritize growth-oriented policies, with an eye toward re-election,” Hyzy says. Since 1928, the S&P 500 has produced an average annual return of 12% with a Republican president and divided Congress—suggesting that stocks can still perform well under political gridlock1. It’s also important to keep in mind that the U.S. economy is in the midst of one of the longest economic expansions in history. When it comes to stocks, “while Washington matters, the private sector matters even more,” Hyzy says.

Policy changes

“We expect few significant policy changes from Washington between now and the 2020 presidential election,” Hyzy notes. With a divided government, additional tax cuts are unlikely, fiscal spending is expected to be constrained, and the regulatory framework should see few changes. Yet in certain areas, such as badly needed infrastructure improvements, there is room for bipartisan agreement.

Geopolitical issues

“We’ll likely see a tougher congressional tone towards Russia, Saudi Arabia and North Korea,” Hyzy believes. “But that shouldn’t affect markets.” Relations with China remain tense, and there may be bipartisan support for trade and investment restrictions. 

When it comes to stocks, “while Washington matters, the private sector matters even more.”  

Chris Hyzy Chief Investment Officer for Merrill Lynch and U.S. Trust

Interest rates and the dollar

“Despite modest decreases in the dollar and 10-year Treasury yields, we saw nothing dramatic immediately following the election,” Hyzy notes. Expectations that the Federal Reserve will raise the Fed Funds rate in December, with three additional increases in 2019, are unchanged.

Potential winners and losers, by sector

Even a modest infrastructure bill could help the Industrials and Materials sectors. And progress on trade issues ahead of the 2020 election could help Consumer, Materials and Industrials companies. Losers could include some Communication Services firms, amid demands for privacy regulations and oversight. The outlook for Healthcare, an area where the parties are sharply divided, remains neutral, Hyzy says.

Read the CIO team’s “Divided Government: Taking Stock of the Midterm Election,” for a closer look at what to expect following the 2018 midterm election.

1 S&P, FactSet, BofA Merrill Lynch Global Research US Equity & US Quant Strategy
Investing involves risk, including the possible loss of principal.

Past performance is not a guarantee of future results.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

November 7, 2018

The Midterm Elections Are Over—Now What Happens in the Markets?

THE POLITICAL ADS ARE A THING OF THE PAST (for the moment), ballots have been cast, and the results are (mostly) in. Are the markets—which have been so turbulent of late—ready to settle down? Let’s look at the historical data. “Typically, midterm election years are quite volatile,” notes Niladri Mukherjee, head of portfolio strategy for the Chief Investment Office in Bank of America’s Global Wealth and Investment Management division. And that has certainly proven true in 2018. He adds, "The S&P 500 index has experienced corrections averaging about 15% during a midterm election year," according to 2018 data from Strategas Research Partners.

That might not sound very encouraging, but he points to better news: The bounce back in the 12 months following the election generally has averaged about 28%, Strategas also found.

Chart of market corrections and rebounds in the past 10 midterm elections

Why the ups and downs? Because, Mukherjee observes, “more populist and less market-friendly policies are often pursued leading up to midterm elections.” In 2018, these hot button issues included trade tensions with China and the potential for more regulation in some corners of the tech sector. Once ballots have been cast, the rhetoric usually cools down a bit. And what follows, as a rule, is a period of stability—which could be excellent news for 2019. Again, according to historical trends, “the third year of a presidential cycle is usually the strongest in terms of market performance,” he says, citing an October 2018 “Investment Strategy Overview” from the Chief Investment Office.

So, does that mean this post-midterm interval is an ideal moment to step up your exposure to the markets? Well, not exactly—or at least, believes Mukherjee, it shouldn’t form the basis for an investment strategy. “Rather, focus on the fundamentals, such as economic growth, corporate profits and valuation levels.” A financial advisor is there to help with the decisions that can help you pursue your goals.

For more insights on market lessons learned in the 2 years since the last presidential election, read the latest Capital Market Outlook  from the Chief Investment Office.

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.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
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 and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Neither U.S. Trust nor any of its affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. 

March 21, 2018

One Good Reason to Review Your Estate Plans Now

THE 2017 TAX LAW DOUBLED the federal estate tax exemption to $22.36 million for couples and $11.18 million for individuals, shielding all but the wealthiest Americans from federal estate taxes. But that larger exemption (which also applies to gift and generation-skipping transfer taxes) expires in 2025, after which the exemptions will drop by about half unless Congress extends them.

Given the temporary nature of this exemption, now might be a very good time to review existing planning documents, such as wills and trusts, to make sure there are no unintended consequences. That’s the recommendation of a new “Wealth Strategy Report: Estate Planning After the 2017 Tax Act,” from the National Wealth Planning Strategies Group.

The new report examines a wide range of scenarios, taking into account how issues such as capital gains and state taxes could affect your estate planning decisions.

Use the report as a guide to discussions you may want to have with your tax, legal and financial advisors. Consider what combination of gifts, credit shelter trusts, and other approaches could help you pass along your wealth to loved ones as tax efficiently as possible—and whether a gift now or a bequest later might make more sense.

The new report examines a wide range of scenarios, taking into account how issues such as capital gains and state taxes could affect your estate planning decisions. These hypothetical scenarios could help drive a conversation with your team about what’s best for your unique situation.

To learn more about how the new tax law could affect your personal estate planning, download “Estate Planning After the 2017 Tax Act” here.

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