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Breaking insights on the economy, market volatility, policy changes and geopolitical events

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March 27, 2023

Proposed tax hikes and what they might mean for you

THE ADMINISTRATION’S $6.9 TRILLION 2024 BUDGET, released on March 9, includes $4.5 trillion in income, corporate, and estate and gift tax increases over 10 years.¹ It’s estimated the hikes will reduce the growth of the deficit by $2.9 trillion over that period. “While the budget has little chance of Congressional approval as is, it will likely frame negotiations over the debt ceiling in the coming months,” notes Mitchell Drossman, head of National Wealth Strategies in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.

Mitchell Drossman, head of National Wealth Strategies, Chief Investment Office, Merrill and Bank of America Private Bank next to his quote “While the budget has little chance of Congressional approval as is, it will likely frame negotiations over the debt ceiling in the coming months.”

“Some of the proposed tax increases are new, but most are recycled from last year’s budget,” Drossman says. “There are also many proposed tax cuts.” A recent CIO tax alert, “Income and Transfer Tax Proposals in Administration’s Fiscal Year 2024 Budget” details the plan. Here are some highlights:

Individual income tax proposals

The budget would reimpose the top 39.6% income tax rate for married couples with taxable income greater than $450,000 (or $400,000 for individuals). Another major change: For taxpayers with income higher than $1 million (married or single), capital gains would be taxed at the 39.6% ordinary income tax rate, rather than the lower capital gains tax rate.

Among other increases, “The current 3.8% investment income surtax would rise to 5% for investment income over $400,000, and the types of income subject to the tax would significantly expand,” Drossman says.

Wealth-transfer tax proposals

A host of proposed changes would affect taxes on wealth transfer, whether through lifetime gifts or as part of an estate. One prominent change could limit the long-term effectiveness of generation-skipping trusts (GSTs), a popular means for families to pass wealth down to grandchildren and subsequent generations while reducing potential estate taxes. “Under the proposal, GSTs would be limited to no more than two generations below the taxpayers,” Drossman says.

Corporate tax proposals

Many businesses, too, would see their taxes rise. Most notably, the top corporate income tax rate would rise to 28% (from 21%) and the tax on overseas profits by U.S. companies would double, to 21%. The plan would also increase the tax rate on corporate stock repurchases to 4%.

Expanded tax credits ease the pain

“It’s not all increases,” Drossman says. “The proposed budget also includes an enhanced child tax credit, an expanded earned income tax credit, generous health insurance premium tax credits and increased employer-provided childcare tax credits for businesses, to name a few.”

While these changes are currently just proposals, now might be a good time to familiarize yourself with them so that you can begin to plan ahead for tax efficiency in 2024. Read the report for full details and speak with your tax professional about what they might mean for you.

¹ CNN, “Biden’s Budget Lays Groundwork for High-Stakes Battles Ahead,” March 9, 2023.

March 20, 2023

Navigating current volatility

Listen to the audiocast below for insights from Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank, on what’s driving market uncertainty, the path to market stability, key indicators to watch and how investors can prepare for steadier times ahead.

Chris Hyzy: Thanks, everyone, for joining this Street Talk Call for March 16th. Lots to discuss today. We're going to try to take it up from the top-down situation and also bottom-up. We recently released a report literally an hour or two ago titled: The Steps to Eventual Stability and we highlight in there five particular steps that all types of so-called systemic perceived crises or just financial crises in general. It's all about confidence, it's all about trust, it's all about liquidity. The knee jerk reaction here is to go back some 15 years ago and even before that, 16 years ago in 2007 when we all started to witness some of the credit spreads, some of the overnight funding spreads, start to widen out and at the time it was a big head scratcher back then as to like, “What is actually going on?” and there was talk of an impending recession. If you remember back in ’07 heading into ’08, back then there was number one, a very different type of foundation than you see today, which is the banking system. The banking system did not have the capital it has today, particularly the large strategic investment banks; significantly more capital on hand; a much cleaner and tighter and higher quality balance sheet also on hand today versus back then. Off balance sheet items are virtually non-existent today versus back then. The interconnectedness of the broker dealer networks are very different today than back then. Now, there's still counterparty risk today. That’s just simply doing business with one another, but it's a very different type of controlled counterparty risk albeit there's still a lot of unknowns and that's one of the reasons why markets are still fragile, they're likely to remain that way in the coming couple of weeks, and you're going to see volatility chops from one day to the next where you might open up significantly down, close the day up, or vice versa. This is all about portfolio repositioning. I'll go through the steps in just a few minutes, but I also want to talk about this particular chain of events and the uniqueness of it. We've highlighted this on previous calls, but the uniqueness of this is not only from a liquidity perspective and confidence and trust and the type of assets, but simply put, it’s a liquidity event that's going on right now, very different than back in ’07, ’08, ‘09 which was a credit event. A credit event has to do with the quality of the assets for sure and at the same time also has to do with the impending connectedness on counterparties in terms of leverage. It's very different this time. What we've witnessed is uniqueness in a particular situation in the United States where it relates to the concentrated deposit base of one particular bank and then ultimately the asset liability mismatch, the ability to fund yourself in the short term and then ultimately buy or invest longer term and as interest rates went up, obviously those assets on a marked to market basis were corrected. Those are high quality assets. Those are very different than the assets that we all saw back in the ’07, ’08, ‘09 arena which in some cases were synthetic packaged and in some cases junk assets relative to the higher quality assets right now i.e. treasuries, agencies, and mortgage backed securities. It doesn't make it necessarily any better in the short term as it relates to, “What is the unknown?” There's still sentiment here, and so we would view this particular episode that's going on right now concerning - number one. Number two, more of a sentiment contagion than as it relates to a credit or an overall counterparty risk around the world contagion albeit there’s going to be a lot of talk about that. Number three, this is more of a liquidity versus a credit event. So, what do you do with this? This is where it gets interesting. First and foremost, I think we're going to have to take a look at three different areas of interest to assess. In other words, how long this is likely to last and how do we get to the other side? So, we outlined some steps in this report called: The Steps to Eventual Stability. Number one, the first step is liquidity. You saw that over the weekend. A liquidity facility was put in place. Just to be specific here, it was called Bank Term Funding Program. You could bring your assets to the window and those assets you lend off of, the Federal Reserve will lend off those assets to the tune of a one-year term at par, so basically they're saying no discount. That also can be leveraged to a certain degree as to what type of assets you bring in for an eligible institution. If you think about it, that is the cost of backstopping insured and uninsured deposits. It's a mixture of the insurance you pay as a depositor plus a so-called term lending facility that is there if an institution needs it to make sure that they don't have to go out and sell assets to raise capital. That is a liquidity event versus an asset credit event, which ultimately could subsidize future growth. Now, we'll talk about the potential impact on the economy in just a minute. So thankfully there was liquidity facility put in place here in the United States – number one. Number two, you saw it kind of filter over into Europe with one of the weakest players in Europe that has been the case for the better part of a decade or more, and that weaker player in Switzerland needed a $50 billion plus backstop from the Swiss national Federal lending facility overall and that money is there also to protect against the balance sheet. That is more of a liquidity backdrop. When you take a look at liquidity coverage ratios across the strategic investment banks, they’re very, very healthy, capital levels healthy, and in Europe to some degree a little bit tougher, a little bit tougher restrictions. In fact, a majority of the banks in Europe – less number of them, but a majority of the banks if not all of them have gone through very highly restrictive type of capital requirements and liquidity coverage ratios etc. It’s one of the reasons why initially the European banks were outperforming significantly. So, what we're watching closely is the regional banking equity shares. There’s a lot of discussions perhaps a lot of these banks will have to raise capital in the equity markets that might make it diluted to shareholders. We'll see how that all goes, but with each and every passing day with the understanding of what this liquidity facility is in the United States and also the willingness by the European Central Bank to be there and other central banks to provide the needed liquidity - not without penalty, but the needed liquidity - should help calm down the markets in the next one to two weeks. So, step one, liquidity – there. Longer term is a little bit more important. Once we get through that bridge period of short-term liquidity presented to itself by central banks, then you switch into, “All right. Who's going to be the liquidity provider in the future once that ends?” That tends to be the private sector. That's where the investor comes back in. There will likely be major changes to who those investors are, but with opportunity - when the opportunity is there, that's where the capital will come. There used to be a statement that was said long ago. “Liquidity will always go to the greatest risk adjusted return. You just got to give it time.” We think similar prospects will happen this time around in the private market. Assets will likely correct to levels that become attractive again on a valuation basis and on a post pandemic, but more importantly, a free cash flow basis. As that happens, with a slightly lower cost of capital given where yields have gone to, we expect the private markets to begin to re-liquefy themselves again, but this is one step at a time. First and foremost, bridge period of loan financing coming from central bank authorities and that has happened. So, step one - we're there. Step two, we're going to need to see clear communication across the board not just from Federal authorities or governmental institutions, but also the private sector. We have a March 22nd meeting coming up by the Federal Reserve in the United States. We have the European Central Bank meeting today. We're going to get more clear communication about the mandate. In the short term, the mandate should shift to a certain degree more towards financial risk protection and away from inflation risk protection, but central banks will likely clearly communicate that they have a double mandate and they will do everything in their power to make sure that they try to walk that double mandate. The shift in the next few weeks - at least possibly maybe the next two to three months - we're more than likely to be an increasing focus clearly on financial risk. So wouldn't be surprised if central banks, after their next move, paused, [assess] exactly the long and variable lag of previous hikes, assess the quantitative tightening, and tightening of financial conditions impact, and then ultimately re-kickstart their hiking program if needed once financial conditions settle down again or financial market risk settles down again or the long and variable lag could come through and showcase, at least in our opinion, that inflation is actually coming down. Forward looking inflation is still very much within the Fed's target. Backward looking inflation is not. When those two things converge, that's where central bank policy ultimately indicates that the pause is the right way to go. So, we've got some time here. Over the next two to three months the inflation dynamics should become more in favor of forward looking inflation what they're telling us and flashing certain signals that it's coming down relative to backward looking type of inflation statistics. So it wouldn't surprise us at all if there was a pause, but still our B of A Global Research Economics Team is expecting a 25 basis point hike literally next week. So clear communication - that’s ongoing. That can't stop. That has to go throughout all the meetings that we see whether it is on the economy, whether it's on leverage, whether it's on the banking system or literally reserves and central banks around the world and that also goes into the corporate profit. Corporate profits, in our opinion, and corporations will likely begin to put a lot of things in the kitchen sink that they weren't going to do, but they're going to do it this time around because the environment is telling them that if there's going to be negative estimate revisions, let's get it out of the way, let's clear the decks, and let's move forward. The investment community will likely give corporations a pass that are going to do that. That could come in the form of cost cutting. It could come in the form of simply negative estimate revisions down to much lower levels so we can re-kickstart. We expect that to happen throughout the back half of the year. Clear communication - step two - very important. Step number three - portfolio repositioning to subside. We're seeing it in front of us right now. There's a lot of repositioning going on. We've been witnessing this for the better part of six months. A big movement initially from growth to value-based sectors and industry groups and companies and then a shift back. Once interest rates were starting to come down and yields were starting to come down in the back half to begin the year, you started to see the growth side of the equation which overcorrected to a certain degree start to outperform. Now you're seeing the growth stocks outperform because the view is that growth is going to be much lower than expected because of the situation that has unfolded, so the growth side of the equation is picking back up and the yield side and conservative side is also picking back up because as bond yields come down, some higher dividend yielding equities that are in the more conservative sectors like utilities are beginning to outperform. So, you're seeing a ton of portfolio repositioning. You’re also seeing de-risking at the same time for global asset allocators around the world, systematic institutional investors as well, and even on the momentum side so that’s why you get very big swings in the market from day to day. It’s very headline risk type of market, fragile market, but at the same time, you see a lot of portfolio repositioning. When do we expect this to subside? In the next earnings quarter we should have a much better outlook on inflation, Fed policy, and the next earnings announcements and the prospective earnings announcements as to what companies are going to do. My expectations in the chief investment office here that we expect portfolio repositioning to subside in the next three months to help us have a little bit less of a volatile backdrop. Step number four, understanding the impact of all this. The knee jerk reaction is to say that things have changed forever. You're starting to hear that out in the halls. You’re starting to hear that on the business media and in the headlines. Things have changed forever all the time. When you go through systemic events, when you go through liquidity crises, when you go through very nervous timeframes, when you go into recession, and when you go into a whole new cycle there’s new leaders, there's new innovation, there's adjustments everywhere. First and foremost, the US economy is extremely resilient. Particularly coming out of the pandemic, the US consumer is very resilient. The job market with low labor pool is still going to be an issue in the years ahead, but again, as Millennials and the Gen. Z cohort continue to age, that labor pool should start to widen out. That also gives companies time to automate the areas that are commoditized, the areas of jobs that simply can be handled by frankly automation or robots. Those are all things and adjustments that need to take place. Re-shoring, on shoring, away from a global interconnected supply chain for everyone. That's not necessarily de-globalization, but it's re-globalization. It's a change to how we do business today, but it's not going from one side of the boat to the next, but you're going to hear a lot about that. The impact of what the chain of events that is still unfolding and once we stabilize is still going to be things like tighter lending standards, higher regulation on the smaller banking franchises, but it also creates bigger opportunities frankly for the areas that are healthy, higher quality. Even though lending velocity is likely to come down in general because we could be going into a mild recession sooner rather than later, coming out on the other side in a much better shape is what we foresee and that lends us to believe that a lot of the higher quality areas throughout the marketplace/throughout the economy will be those providers of capital in a very, very strong way. It'll be a change to how things are done to a certain degree, but it's not going to push it backwards at least in our opinion. It will be an adjustment as to how things get done and again, higher quality relative to lower quality is the way we would think about it. Also, it could bring forward the earnings recession that everyone's been talking about that has been delayed. Largely speaking, because companies will use this as an opportunity to put everything in there, clear the decks, and start anew and that lends itself to slower growth, estimate revisions going down one more time, and then ultimately most likely tighter regulation, higher lending standards, and that means financial conditions are going to remain tight for a period of time. We expect this to cease and start to subside itself heading into 2024, but we've got some frankly wood to chop before we get there but understanding the impact is likely to be between now and the end of the year, “What ultimately happens to profit forecasts, economic forecasts, etc. and also inflation?” All of which could bring forward what we've all been waiting for, which is that move into recessionary times which also brings forward the bottoming overall and also brings forward the turn. So that brings us to step number five. This is when the reset ends. What's the reset? The first reset is you need liquidity. The second is how does portfolio repositioning subside? The third is understanding the overall impact of growth. Once you have all that, the reset ends at least in our view and you could start to see what's on the other side. Now, here's where it gets interesting, “What's on the other side?” is one thing. “What are the leaders to help us get to the other side and through and grow the other side?” is another thing and that's still, in our opinion, is the old economy sectors - it's parts of technology, it's a good portion of the industrial base, it’s the changes to how small businesses will receive their capital and funding of the future. The knee jerk reaction is to suggest that venture capital is going to go backwards, that the high growth sector, the innovation sector, the pre-IPO sector of our economy is going to grow a lot slower in the years ahead. The knee jerk reaction is to suggest that in some cases the game is over. That's simply not how commerce works. That's not how the capital flow works. Ultimately, you get through the challenges. The opportunity set becomes wide again. It may be in different areas and different providers of capital, but overall, this is a bridge period that we have to work through but once we come out on the other side, markets tend to climb the wall of worry. As the reset ends that's what we expect and we expect another long-term bull market to be born once again this time led by earnings, not by PE multiple expansion. Long term bull markets that are led with a tailwind by earnings and profits that ultimately grow again lend itself to a little bit more of a consistent bull market, a longer one at least in our view, and less volatility overall. Now, the volatility might be a little bit higher than what we're all used to because we don't have 0% interest rates anymore, but the choppiness of the movements should be less. So less episodic volatility, perhaps a higher level of volatility because yields are higher, cash yields are higher, and ultimately an understanding of where we're headed is higher, but when you think through the next decade, when you think through the next five, or six, seven years, the prospects haven't changed. The prospects still are, “Where's the growth? Who's going to be the profit drivers? How do we invest in those areas?” and most importantly without question at least in our opinion is at the top of the mind is a diversified portfolio. We firmly believe, although it's been called into question so many times in so many cases over so many decades, that a diversified portfolio, rebalancing mechanisms when things get tough or when things get too good, is a solid investment process. Having a plan, being ready, and as we get to the other side, we're starting to invest in those areas that will be the new leaders. If you do it on a dollar cost averaging basis as cash flow comes into the portfolio, you end up getting attractive price movements for you as you're reinvesting. We don't try to time markets. That's for somebody else. We believe time in the markets is the way to think about it. We believe now is the time to let the dust settle. Let things stabilize a little bit. Let's make sure that we're out of this liquidity type of so-called crisis market environment as we get through that, which we think in the next one to two weeks we’ll start to see more clarity on that. We also believe that those facilities will remain if needed and at the same time, we think that yields are now going to come down a little bit closer to where current yields are, allowing some of those assets that did correct to revalue themselves upward. As that happens, we need to be ready, we need to reset expectations, and make sure we have plans to reinvest again. For now, we are neutral equities. We are neutral fixed income. We believe in diversification at its highest level. We want to say higher quality, stick to cash flow where you can, and as we come out on the other side, look for new growth leaders. So that'll do it for the upfront comments for today. Thanks for listening.

Operator: Please see important disclosures provided on this page.

END

Tune in regularly to the CIO Market Update audiocast series for the news and insights you need to navigate today’s fast-moving markets.

March 8, 2023

What women have in common with the U.S. economy

“WOMEN’S POWER OF THE PURSE is simply staggering, globally,” says Lauren Sanfilippo, senior investment strategy analyst with the Chief Investment Office, Merrill and Bank of America Private Bank. Last year, women’s income topped $24.5 trillion globally.¹ “That puts women on a par with the total size of the U.S. economy,” she adds. “Simply put, women have become one of the largest economic forces in the world.”

Lauren Sanfilippo, senior investment strategy analyst, Chief Investment Office, Merrill and Bank of America Private Bank next to his quote “Women’s economic strength has clear investment implications.”

Some other milestones to celebrate this International Women’s Day and throughout the year: The number of female CEOs — 53 — is at an all-time high.¹ Women are more likely to be enrolled in college today than men, and degree-holding women are more likely to be employed than men with higher ed degrees.¹ They are, however, vastly underrepresented in the STEM professions, which may offer some of the fastest growing and highest paying jobs of the future, notes Sanfilippo. Clearly, more progress is needed. According to the United Nations, which measures progress towards gender equality as part of its Sustainable Development Goals, more than 3 billion girls and women lived in countries with “poor” or “very poor” scores in 2020.¹

Ways to invest in women’s spending power

Achieving gender equality benefits everyone, says Sanfilippo. Research has shown that women invest a larger portion of their income in their families and communities than men.² But that’s not all. “Women’s economic strength has clear investment implications,” she adds. Companies that cater to women — and value their talents in the workforce — are best positioned for long-term growth,” she believes. Global brand leaders across multiple sectors, from automobiles to technology and high-end luxury, can benefit from women’s spending power. And on a global level, nations that prioritize gender equality should experience stronger long-term growth rates.

To learn more about women’s economic progress — including which countries are making the most progress in reaching the UN’s gender equality goals — read “Reality Check: The Promise and Plight of Women.”

¹ “Reality Check: The Promise and Plight of Women,” Chief Investment Office,” March, 2023.

² “Investing in Women and Girls,” OECD.org, 2018.

February 13, 2023

Early 2023 surprises hint at improving markets ahead

DESPITE ALL THE TALK about high inflation, global turmoil and the possibility of recession, “so far it’s been a surprisingly good year for many investors,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

What are the economy and markets doing right?

Please read important information at the end of this program. Recorded on 02/07/2023.

With all the talk about high inflation and interest rates, global turmoil and recession, you could easily overlook that so far, 2023 has been a pretty good year for many investors. Surprisingly good, in fact.

Hello, I’m Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

CHRIS HYZY

Chief Investment Officer

Merrill and Bank of America Private Bank

Let’s look at a few of those surprises.

[GRAPHIC CARD]

Early 2023 surprises

· January was a strong month for stocks

· Small-cap stocks have outperformed expectations

As-of Feb. 7, 2023

U.S. stocks posted strong gains in January, major global indexes started the year up 5% or more, and even beleaguered tech stocks have rallied. Small-cap stocks have done significantly better than expected at a time when inflation and slower economic growth seemed likely to pressure them.

[GRAPHIC CARD]

Early 2023 surprises

· January was a strong month for stocks

· Small-cap stocks have outperformed expectations

· Fed raised rates by only 0.25% at its Feb. 1 meeting

As-of Feb. 7, 2023

The Federal Reserve recently raised interest rates by only 25 basis points. That’s about half the increase we saw in December and a sign of Fed confidence that inflation is finally moderating.

[GRAPHIC CARD]

Early 2023 surprises

· January was a strong month for stocks

· Small-cap stocks have outperformed expectations

· Fed raised rates by just 0.25% at its Feb. 1 meeting

· Europe’s economy has been looking up

As-of Feb. 7, 2023

And there was a big surprise overseas: Europe. A mild winter has kept energy prices under control despite the war in Ukraine, and the reopening of China, Europe’s largest trading partner, has boosted the economy. Add it all up and European stocks have thus far outperformed expectations.

You may be asking, “Why are market watchers downplaying the good news?” We’re wondering the same. Some worry about lack of liquidity in the bond markets or that money supply growth turned negative. Others say the recent tech rally is misleading and stock valuations must drop further before they finally bottom out.

These are all valid concerns. Now, we’re not out of the woods yet, and we still think a mild recession is likely later this year or in early 2024.

[LOWER 3rd]

We believe markets may have already

factored in some of the biggest risks

But we also believe markets may have already factored in some of the biggest risks that we have all been discussing for quite some time … and what we are seeing is a glimpse of a new and improved economic and market cycle ahead.

How can you prepare?

We suggest a two-part approach:

[GRAPHIC CARD]

2 approaches you could take to prepare

· Consider more “defensive” investments for now:

o U.S. Treasuries and municipals bonds

o Healthcare and energy stocks

First, consider an active approach on defense for the next several months of uncertainty. More attractive yields likely mean bonds such as U.S. Treasuries and municipals are competitive again and can provide a good ballast to portfolios. Among stocks, we are currently favoring healthcare and energy sector stocks for potential total return, including dividends and solid earnings growth.

[GRAPHIC CARD]

2 approaches you could take to prepare

· Consider more “defensive” investments for now:

o U.S. Treasuries and municipals bonds

o Healthcare and energy stocks

· Consider more “offensive” investments later this year:

o Value and small-cap stocks

o European and emerging markets

But we also believe you should consider shifting to offense for a time of greater stability 12 to 18 months out. You might already start looking for opportunities to strategically add exposure to value stocks, small-caps, and European and emerging markets stocks, among others.

[LOWER 3rd]

Remember to stay diversified across

and within different asset classes.

As you look ahead for opportunities, though, remember it’s important to stay diversified across different types of assets and within each asset class. Market direction can change quickly and many times without clear signals.

If you’re working with an advisor, be sure to speak with them about steps to consider based upon your goals and what’s in your best interest. And we’ll continue to keep you posted as events unfold.

Thank you.

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.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

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 advisor.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

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Investment products:

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May Lose Value

Among the surprises: U.S. stocks posted strong gains in January, major global indexes started the year up 5% or more, and the Federal Reserve’s (the Fed’s) .25% rate hike in February was about half the size of December’s increase.¹ “It’s a sign of Fed confidence that inflation is finally moderating,” believes Hyzy. “We’re not out of the woods yet, and we still think a mild recession is likely later this year or in early 2024,” he says. “But what we are seeing is a glimpse of a new and improved economic and market cycle ahead.”

In the video above, Hyzy offers a two-part investing approach to help investors prepare for a time of greater stability 12 to 18 months out and manage investments in the meantime. “As you look ahead for potential opportunities,” Hyzy says, “remember it’s important to stay diversified across different types of assets and within each asset class. Market direction can change quickly — many times without clear signals.”

Read “Distortions Are Rebalancing and Markets Are Applauding” for more actionable insights from the Chief Investment Office (CIO), and tune in to the CIO Market Update audiocast series for weekly commentary from our analysts.

¹ The Conference Board, “Fed Hikes by 25 BPS, but Indicates Terminal Rate Is Close,” February 1, 2023.

January 24, 2023

Could debt ceiling negotiations slow economic recovery?

WHEN THE U.S. GOVERNMENT HIT ITS DEBT CEILING on January 19, the Treasury Department began using “extraordinary measures” to enable the government to pay its bills.¹ While these measures could keep the government open for several more months as a divided Congress negotiates a new debt limit — and the markets so far seem not to be affected — investors should be aware of the potential longer term impact the Treasury’s moves could have on the economy.

Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank next to his quote “Uncertainty around the debt ceiling adds a new layer of concern. But we still expect a long-term bull market to take shape next year.”

“The debt ceiling is a light gray cloud for now, likely to grow darker as negotiations unfold in a more assertive way,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. One concern is that the measures the Treasury must take to honor its obligations run counter to the efforts the Federal Reserve (the Fed) has been making to tame inflation, notes Robert T. McGee, head of CIO Macro Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. A recent Capital Markets Outlook report from the Chief Investment Office (CIO) lays out the details.

What the debt ceiling is — and why it matters

Established by Congress more than a century ago, the debt ceiling (or debt limit) determines how much money the government can borrow to meet existing obligations, ranging from salaries for government employees and payments to government contractors to national debt interest.² When the limit (currently nearly $31.4 trillion) is reached, Congress must raise or suspend the limit in order for the government to pay its bills. This has happened 78 times since 1960, according to the Treasury Department. If the limit is not adjusted, the government may partially shut down — this happened most recently for 35 days in December 2018 and January 2019, the longest shutdown on record.³

As Congress debates the 2023 debt ceiling, “the Treasury must shuffle funds to meet government obligations and avert a shutdown,” says McGee. While not a permanent solution, the Treasury estimates it can provide the necessary money to pay bills through June, though some economists consider that a conservative estimate.

Economic ripple effects

The Treasury’s shuffling of funds adds liquidity to the banking system at a time when the Fed is attempting the exact opposite — tightening the money supply and raising interest rates in order to keep inflation under control. When the debt situation is ultimately resolved, the Fed may have to start tightening all over again, McGee says. Should the economy enter a recession this year, as many observers expect, the need to further tighten would leave the Fed with less ability to take steps to help stimulate the economy into recovery.

What this could mean for investors

“Uncertainty around the debt ceiling adds a new layer of concern,” says Hyzy. “But we still expect a new long-term bull market to take shape next year.” Adds McGee: “As the debt ceiling drama plays out, current financial conditions favor long-duration bonds.” A delayed U.S. economic recovery could favor non-U.S. stocks, particularly those likely to benefit from China’s COVID reopening. “The current situation also calls for a high level of diversification and higher quality across asset classes,” McGee says.

¹ CNN, “US Hits Debt Ceiling, Prompting Treasury to Take Extraordinary Measures,” Jan. 19, 2023.

² U.S. Department of the Treasury, “Debt Limit.”

³ Committee for a Responsible Federal Budget, “Q&A: Everything You Should Know About Government Shutdowns,” Dec. 12, 2022.

January 20, 2023

To make the most of new tax laws, start 2023 tax planning now

THE APRIL 18 TAX DEADLINE is just three months away. But, as you calculate how much you owe for tax year 2022, it’s not too early to start planning ahead for tax year 2023. “In many cases, beginning-of-year tax planning can be more effective than end-of-year strategizing,” says Mitchell Drossman, head of National Wealth Strategies in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.

That’s especially true this year, with the passage of two pieces of legislation — the Inflation Reduction Act and the SECURE 2.0 Act of 2022 — that create potential new tax credits and deductions for taxpayers going forward. “Your tax specialist and financial advisor can help you consider best-, worst- and base-case financial and tax projections, with periodic updates throughout the year,” Drossman suggests.

Mitchell Drossman, head of National Wealth Strategies, Chief Investment Office, Merrill and Bank of America Private Bank next to his quote “Thresholds for ordinary income and capital gains taxes, the standard deduction, IRA contribution limits and retirement contribution caps all have risen for 2023.”

How new tax laws could change your calculations

Inflation’s impact on taxes. “Thresholds for ordinary income and capital gains taxes, the standard deduction, IRA contribution limits and retirement contribution caps all have risen for 2023, thanks to inflation adjustments,” Drossman says. Ask your tax professional and financial advisor about ways you can plan ahead to make the most of these changes to help minimize next year’s tax liability, he adds.

More tax-advantaged ways to save for retirement. The SECURE 2.0 Act raises the age for taking required minimum distributions (RMD) from tax-advantaged retirement plans to 73 in 2023, from 72 in 2022, and again to 75 in 2033. That could mean extra time for you to keep all of your savings invested for potential growth or to consider a Roth conversion during your retirement years, thus eliminating RMDs altogether. While not every provision takes effect this year, the law will also soon help young employees to start saving while paying off student debt and will shortly boost “catch-up” opportunities for those nearing retirement, among other changes. With these in mind, now may be a good time for investors of all ages to consider upping their retirement contributions to tax-advantaged plans, Drossman says. In fact, he adds, that’s one thing you can still consider doing for tax year 2022: You have until April 18, 2023 to make 2022 contributions to a tax-advantaged traditional or Roth IRA¹, if you haven’t already reached the contribution limit.

Green tax credits galore. Planning to make your home more energy efficient? Here’s incentive to start now: For 2023, the Inflation Reduction Act increased tax credit limits to $1,200 per year (up from $500 over a lifetime), covering 30% of the cost for windows and doors, insulation and heating and air conditioning equipment. The Act also added or expanded tax credits for renewable energy systems and new or used clean vehicles.

For a more detailed dive into tax strategies to discuss with your tax professional and financial advisor, read “2022 Year-End Tax Planning” and “Beginning of Year Tax Planning” from the CIO.

¹ Internal Revenue Service, “IRA Year-End Reminders,” October 26, 2022.

January 12, 2023

SECURE 2.0 offers help for retirement savers of all ages

THE NEW YEAR BRINGS NEW REASONS to revisit — and possibly increase — your retirement plan contributions. The SECURE 2.0 Act of 2022— part of the $1.7 trillion Consolidated Appropriation Act signed into law back in December — makes it easier for taxpayers of all ages to save more for retirement.

“SECURE 2.0 attempts to address deficiencies in retirement plan participation and savings,” says Mitchell Drossman, head of National Wealth Strategies in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. Several key provisions are highlighted below. But there’s much more. For a broader look, read “Tax Alert 2023-01: SECURE 2.0 Provisions Affecting Retirement Plans and IRAs”

What’s new for younger workers?

It’s about to become easier to save for retirement while paying off student loans. “While many provisions benefit older savers, the SECURE 2.0 Act also aims to help new employees get in the retirement savings habit,” says Drossman. Recent graduates with significant debt often must prioritize repaying loans over saving for retirement. The new law addresses that by enabling employers (starting in 2024) to make matching contributions to retirement plans based on the amount of student debt an employee is repaying (up to the amount that employee would be eligible to contribute to their own plan).

Saving becomes automatic. To increase participation, starting in 2024 companies offering new retirement plans must automatically enroll employees and periodically increase their employees’ plan contributions. Employees may still choose to opt out, but automatic enrollment can encourage more employees to save, Drossman notes.

More incentives for those closer to retirement

Higher “catch-up” contributions. Catch-up contributions have long been a way for individuals over 50 to save additional amounts in their tax-advantaged plans. Starting in 2024, the new law allows participants in 401(k) and 403(b) plans aged 60 through 63 to contribute $10,000 or 150% of the standard catch-up amount, whichever is greater. (For participants in SIMPLE IRAs and SIMPLE 401(k) plans, the limits are $5,000 or 150%). But there’s a catch: Starting in 2024, those earning more than $145,000 will have to make catch-up contributions to a Roth IRA or Roth 401(k) plan. In other words, they’ll have to contribute post-tax dollars, though the distributions will be tax free when they take them out in retirement.

Later RMDs mean more time to invest. The new law raises the age for taking required minimum distributions (RMDs) to 73 in 2023, up from 72 last year and 70.5 as recently as 2019. The change reflects the fact that many Americans are choosing to work longer, Drossman says. “Forcing people to take distributions while they’re still working conflicts with the goal of saving for retirement.” In 2033, the age will rise to 75. All of which means potentially more years for your investments to grow before you must take money out.

Lower penalties for missing the RMD deadline. Failure to take distributions on time has traditionally meant a penalty of 50% of the amount of the missed RMD, Drossman notes. The SECURE 2.0 Act cuts the penalty to 25% starting this year, and it could even be lowered to 10% in some cases. These and other changes often contain complex requirements, he adds. Speak with your plan administrator, your tax professional and your advisor about how best to take advantage of the new opportunities this legislation offers.

December 16, 2022

Outlook 2023: Inflation’s decline a good sign

WILL THE PERFECT MARKET STORM OF 2022 finally blow itself out in the year to come? That’s the consensus emerging from top Chief Investment Office strategists in a new webcast, “Outlook 2023: Back to the (New) Future.”

“High inflation, rising rates, geopolitical volatility and more led to one of the worst years on record for stocks and bonds,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “We believe those disruptive forces will ease in the new year, eventually paving the way for a new bull market cycle.”

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank next to his quote “We believe disruptive forces will ease in the new year, eventually paving the way for a new bull market cycle.”

As a potential step in that direction, the Federal Reserve (the Fed) on Wednesday raised interest rates by .5%.¹ That’s lower than hikes of .75% at Fed meetings earlier this year and comes after inflation eased in November, with the Consumer Price Index (CPI) falling to 7.1%, compared with 7.7% for October.²

Still, the road to recovery won’t be fast or easy, Hyzy says. Assuming the positive trends continue, here’s how potential opportunities could unfold.

Look to bonds early in the year

As investors navigate early challenges in 2023, bonds present a surprising bright spot, says Matthew Diczok, head of Fixed Income Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. U.S. Treasury yields are for the first time in years outpacing dividends for S&P 500 stocks. “During the worst of the pandemic, bond yields were losing 2% to inflation,” he says. “Today, bond investors can achieve a yield above inflation, which is a wonderful change for savers.”

Shift your attention to stocks in the second half

“We believe that inflation will fall further, interest rates and the U.S. dollar will peak and the Fed will pause further increases in 2023,” says Marci McGregor, senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. “We see 2023 bringing the end to this cyclical bear market, and we’ll want to consider assets such as stocks that outperform during recoveries.”

Historically, value stocks (those the market may currently be undervaluing) do better than growth stocks during the recovery stage of the cycle, adds McGregor. Moreover, “We think small cap stocks will outperform large caps when the Fed pauses and again when it cuts rates.” Energy — both traditional and renewable — remains attractive, she says.

For now, one of the most important things investors can do is remain patient, look beyond periodic volatility in early 2023 and continue to invest and plan for the future. “That can be hard,” Hyzy says, “but at moments like these taking the long-term view is more important than ever.”

For more year-ahead insights, read “Outlook 2023: Why This Could Be a Pivotal Year for Investors” and visit our Insights page regularly for updates.

_{¹ The Wall Street Journal, "Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely," Dec. 14, 2022.}

_{² The Wall Street Journal, “U.S. Inflation Eased in November, CPI Report Shows,” updated Dec. 13, 2022.}

November 14, 2022

The voters have spoken — how will the markets react?

PRELIMINARY MIDTERM ELECTION RESULTS SURPRISED MARKETS that had already priced in a decisive Republican sweep. “Leading up to the elections, we had seen the equity markets advance, particularly in the last couple of weeks,” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.

Instead, with votes still being tallied, Republicans now appear likely to take control of the House of Representatives by a slim margin, and Democrats have retained control of the Senate. Below, Dan Clifton, head of Washington Research for Strategas Research Partners, provides insights on the midterms and the likely impact on markets and the economy moving forward.

Dan Clifton, head of Washington Research, Strategas Research Partners next to his quote “Historically, the combination of a Democratic president, Republican House and Democratic Senate has produced a 13.6% increase in the S&P 500 over the next year.”

Why gridlock can be good for the markets

While gridlock can be a negative for the economy, markets respond favorably to the idea that a president or Congress may have a harder time enacting new spending, tax increases and regulation. A slimmer-than-expected Republican majority in the House, with Democrats holding on to the Senate, would still bring a degree of gridlock, Clifton notes. New tax increases or energy regulation would be unlikely over the next two years, for example, he says. But Republicans may be unable to slow the progress of existing bills such as the Inflation Reduction Act, promising billions of dollars in spending on green energy. “Historically, the combination of a Democratic president, Republican House and Democratic Senate has produced a 13.6% increase in the S&P 500 over the next year,”¹ he adds.

All eyes on the lame-duck session

The remainder of 2022 could be a key time to accomplish goals that benefit both parties, Clifton notes. For example, “Both parties have an incentive to hammer out a budget.” Washington may also find bipartisan agreement to raise the debt ceiling before the new Congress takes office, he adds. These actions would help avoid headaches for both parties next year, and they also could mollify markets, since pitched battles over budgets and debt ceilings are a type of gridlock that markets don’t like, Clifton says. Despite partisan tensions, lawmakers may also find common ground on the National Defense Authorization Act, funding the military, and on corporate tax credits, established during the previous administration, that are set to expire, he adds.

Sectors that could potentially benefit

In anticipation of a larger Republican victory, markets had priced in a potential reduction in green energy spending. Now, “there may be a bit of a rally in clean energy stocks,” Clifton says. Infrastructure-related companies, too, may prosper as they begin to see a bump in spending related to 2021’s Infrastructure Investment and Jobs Act. In other sectors, the impact of the midterm elections may be overshadowed by the economic and market volatility that 2022 has already experienced, thanks to inflation, rising interest rates, geopolitical instability and other factors, Clifton notes. Biotechnology and pharmaceuticals, meanwhile, will likely continue to perform well in a time of inflation.

Looking ahead to 2024

Heads are already turning to the election two years from now, which will include a presidential race. “The market will start anticipating outcomes almost immediately,” Clifton notes. With the potential for races focusing less on partisan hostility and more on policy matters, he says, “I think the 2024 election is going to be one of the great elections of our lifetime.”

To hear the complete conversation between Hyzy and Clifton, recorded on November 9, listen to the “Special CIO Post-election Market Update Call.” For regular insights on the markets and the economy, tune in to the CIO Market Update audiocast series.

¹ Strategas Research Partners, based on FactSet S&P 500 data.

October 28, 2022

Will there be a post-midterm market rally?

AT A TIME OF SHARP INFLATION, rapidly rising interest rates, uncertainty around the midterms and other pressures, the approaching Nov. 8 elections have already seen the fourth-largest midterm drawdown since 1950, says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. But, historically, midterm market volatility has been followed by market growth lasting through the first half of the following year. In fact, “the average gain from the midterm market low point, one year after the election, is about 32%,”¹Hyzy notes.

Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank next to his quote “The average gain from the midterm market low point, one year after the election, is about 32%.”

However, because this time around any potential market rally might be delayed by a mild recession, Hyzy encourages investors to look to the future. “With great resets come great opportunities,” he says. The outcome of the midterms could determine where some of those potential investment opportunities lie.

Investing in a time of gridlock

With inflation and the economy at the forefront of voters’ minds in 2022, “Republicans appear in pretty good shape to win back control of the House of Representatives,” says Jim Carlisle, head of Federal Government Relations at Bank of America. The Senate remains too close to predict, he says, adding that a split Congress would result in gridlock.

Marci McGregor, senior investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank next to his quote “Regardless of the election outcome, defense spending is likely to continue to support Ukraine and build our peacetime arsenal.”

With no new legislation getting through, Democrats would likely shift to implementing infrastructure and green energy projects paid for under bills that have already passed. “Republicans would likely focus on crime, energy independence and border security,” notes Carlisle. Areas of common ground might include regulating crypto assets and enhancing digital privacy.

Post-midterm strategies to consider

With so many unknowns, investors should stay diversified and avoid trying to time the markets based on short-term predictions, Hyzy notes. “Now is a good time to step back and take a deep breath,” he says. “Between the midterms and year-end, we should get a better view of corporate profits and momentum for next year.” In the meantime, investors can consider the following three strategies.

Look for bipartisan opportunity. “Regardless of the election outcome, defense spending is likely to continue to support Ukraine and to rebuild our peacetime arsenal,” says Marci McGregor, senior investment strategist for the Chief Investment Office, Merrill and Bank of America Private Bank. “Another key area to consider is cybersecurity.”
Pivot to bonds. “While rising rates have created one of the worst years ever for bond investors, we believe adding longer-term Treasurys or municipal bonds now through 2023 makes sense,” Hyzy says. Should a mild recession in early 2023 prompt the Fed to pause rate hikes, “bonds could help diversify a portfolio and deliver yield and return at the same time.”
Focus on big-picture opportunities. “Long-term investors should consider industries likely to drive innovation,” McGregor believes. Areas such as digitalization, robotics, healthcare infrastructure and renewable energy “may regenerate and ultimately underpin markets as we get into a new cycle.”

For more midterm market perspectives, listen to “Midterm Market Effect: What to Look for After the Election,” and read “Midterm Elections 2022: Potential Outcomes and Investment Implications.”

¹ Strategas Research Partners, Chief Investment Office. Data as of October 14, 2022.

October 12, 2022

What could the midterms mean for the markets and economy?

AMID INFLATION, RISING INTEREST RATES, MARKET VOLATILITY and geopolitical conflict, the November 8 midterm elections may be drawing less attention than usual from financial observers, says Marci McGregor, senior investment strategist for the Chief Investment Office, Merrill and Bank of America Private Bank. “In a typical midterm year, this would be the dominant subject,” she says. Yet while the elections may be competing for headline space, investors should not discount their potential impact on policy, the economy and markets, she adds.

Libby Cantrill, head of public policy, PIMCO next to his quote “A shift in Congress would throw sand in the gears of regulatory efforts — and investment markets may favor the prospect of fewer business regulations.”

For perspectives on the elections, what a shift in Congressional power could mean, and likely next moves from the Federal Reserve (the Fed), McGregor turned to Libby Cantrill, head of public policy for the global bond firm PIMCO.

Q: Historically, what have the midterms meant for the party in power?

While there’s no sure way to predict outcomes, midterm elections historically tend to work against whichever party currently holds the White House, especially during a president’s first term, Cantrill says. “Since World War II, the party in power has lost an average of 26 seats in the House of Representatives and four in the Senate.” As in previous midterms, a party turnover may be likeliest in the House, where all 435 seats are up for election, versus 34 of 100 Senate seats, she adds.

Q: What are the implications for the markets and economy?

Over the past two years, new laws such as the Inflation Reduction Act have passed with slim margins along party lines. A change in control in one or both houses of Congress would likely bring “gridlock, meaning that the administration’s legislative agenda is completely frozen,” Cantrill says. For the next two years at least, that would likely mean no new changes to the tax code. Additionally, “a shift in Congress would throw sand in the gears of regulatory efforts — and investment markets may favor the prospect of fewer business regulations,” she adds.

Libby Cantrill, head of head of public policy, PIMCO next to his quote “The downside, if Congress flips, is that we should expect more policy volatility around things that are relatively routine. So, funding the government becomes much more difficult.”

“The downside, if Congress flips, is that we should expect more policy volatility around things that are relatively routine. So funding the government becomes much more difficult,” Cantrill says. Gridlock could lead to potential government shutdowns, as well as protracted battles over everything from the debt ceiling to the administration’s new student loan forgiveness policy and fiscal support for the economy in the event of a recession. “I liken it to the fiscal punchbowl being taken away,” Cantrill says.

Q: Speaking of recession, what’s the likelihood we’ll see one?

Regardless of the election results, the Fed is likely to continue raising interest rates until inflation comes under control, Cantrill believes. That’s because the Fed is worried that inflation is becoming more entrenched. Further rate hikes could lead to a “hard landing” for the economy, she adds. “The degree of recession, though, if we have one, is an open question. Our base case is that it would be a shallow but persistent recession, but there is more downside to that growth prediction, meaning we could see a deeper recession.”

Tune in to Merrill’s CIO Market Update audiocast series, for regular insights on the markets and economy.

Important Disclosures

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

Opinions are as of the date of these articles and are subject to change.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S" or “Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. 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.

These risks are magnified for investments made in emerging markets. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.

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You have choices about what to do with your 401(k) or other type of plan-sponsored accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over a 401(k) from a prior employer to a 401(k) at your new employer, take a distribution, or leave the account where it is. Each choice may off er different investments and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment (particularly with reference to employer stock), and provide different protection from creditors and legal judgments. These are complex choices and should be considered with care.

Diversification does not ensure a profit or protect against loss in declining markets.

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