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August 4, 2020

Big Companies Are Likely to Get Bigger—What Could That Mean for Your Portfolio?

TOP U.S. TECHNOLOGY COMPANIES do more than dominate their industry. Many started out of garages and dorm rooms, and now represent nearly a quarter of the total S&P 500 market capitalization.1

 

That’s not just an anomaly of the fast-growing tech sector. Industry after industry is consolidating in the hands of its biggest players, says Kathryn C. McDonald, Vice President and Market Strategy Analyst, Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “Market concentration has risen in 75% of U.S. industries over the past 20 years.” And, McDonald adds, the coronavirus pandemic is accelerating that trend by separating the weak from the strong.

 

“Market concentration has risen in 75% of U.S. industries over the past 20 years.” —Kathryn C. McDonald, Vice President and Market Strategy Analyst in the Chief Investment Office for Merrill and Bank of America Private Bank

 

Consolidation during crisis

“Big companies are likely to get bigger and gain market share from smaller competitors” as a result of the pandemic, notes McDonald. Already, the top four U.S. airlines control 80% of the market, three companies process two-thirds of U.S. beef, and health care has averaged 70 hospital mergers per year since 2010, according to a new CIO report, “The Great Consolidation: Industry and Equity Market Concentration After the Crisis,” co-authored by McDonald and Nick Giorgi, a vice president and investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank.

 

The pandemic could lead to new mergers and acquisitions, as well as bankruptcies of struggling firms. “Meanwhile, industry leaders with stronger balance sheets are likely to be more resilient,” McDonald says. And consumers may be more loyal to major brands that they know and trust.

 

What this trend could mean for investors

Though smaller companies and innovative startups continually refresh the landscape, consolidation offers investors the opportunity to potentially benefit from strong performance by larger, more established companies. “Sectors with rising concentration have tended to enjoy better stock performance in recent decades.”2 says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “We favor high-quality names with strong balance sheets, valuable intangible assets and strong cash flow.”

 

“While we prefer large-cap stocks at this point in time, we recommend a diversified allocation across the spectrum.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Investors may find long-term potential opportunities in financial services, consumer goods, industrials, healthcare, technology, energy and other industries whose largest firms are investing in growth even during the recession, Hyzy says. However, he cautions, that doesn’t mean you should abandon stocks of smaller companies. “While we prefer large-cap stocks at this point in time, we recommend a diversified allocation across the spectrum.”

 

Minding the risks

Hyzy offers this useful reminder: Size can come with risk. Take big tech—its growing influence in the global economy may be skewing wealth and market share toward a handful of companies. That possibility has prompted some regulatory risk for some of the most visible tech industry leaders, with lawmakers potentially introducing legislation that could limit or reverse the companies' concentration of power. Companies that use their size and influence to benefit society as well as the bottom line could stand to benefit, while those that, for instance, ignore or de-emphasize environmental, social and governance (ESG) issues could potentially be at greater risk.

 


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Source: Bloomberg, data as of July 2020.

 

Grullon, G., Larkin, Y., and Michaely, R. “Are U.S. Industries Becoming More Concentrated?” Oxford Review of Finance, April 2019.

 

Information is as of 08/04/2020.

 

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

 

Investing involves risk including 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.

 

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.

 

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.

 

Stocks of small- and mid-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

 

Investing in growth stocks incurs the possibility of losses because their prices are sensitive to changes in current or expected earnings. Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the manager’s assessment of a company’s prospects is wrong, the price of its stock may not approach the value the manager has placed on it.

 

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.

 

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

 

 

July 24, 2020

Growth or Value Stocks?  Why the Answer Today May Be ‘Both’

STOCK INVESTORS POSITIONING THEIR PORTFOLIOS for economic recovery have given fresh urgency to an age-old debate: growth or value?

 

Growth investors seek stocks or mutual funds of companies offering the potential for strong earnings growth. Though there are no guarantees, growth investors can be willing to pay a higher-than-average price for these stocks in hopes that the prices will rise still higher, despite their greater tendency to be affected by market swings.

 

“As people and investors, we like to put things in boxes. But today’s marketplace represents a confluence of growth and value.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Value investors, on the other hand, look for companies whose prices may have fallen, but that still have strong fundamentals. They’re looking to capitalize when and if those companies regain their lost value. These stocks, generally of well established companies with proven histories of financial performance, also often can offer dividends.

 

But in today’s market, the distinctions between growth and value are blurring, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Choosing one at the expense of the other could be a mistake. “As people and investors, we like to put things in boxes. But today’s marketplace represents a confluence of growth and value.”

 

As technology redefines entire industries and sectors once considered value-oriented adjust to new realities, potential opportunities for growth exist more broadly, Hyzy says. As an example, he points to the industrial sector, once viewed as too stodgy for growth investors. “Industrials are now seen as a growth area, thanks to innovation and disruptive technologies.” Similarly, the consumer sector, which used to be known primarily for cyclical growth, currently has more resilience. And the major tech companies, no longer the new kids on the block, now could be more likely to offer dividends.

 

“When lines get blurry, you need to have a diversified mixture,” Hyzy says. What’s more, both growth and value have their place in an economy seeking to recover from the ongoing effects of the coronavirus. Growth stocks tend to do well when interest rates are low and corporate earnings are rising. Value stocks tend to perform well early in an economic recovery, though the benefits may diminish in a prolonged bull market.

 

The most important thing, Hyzy says, is to consider all of your goals and timelines and build your strategies around them. Hyzy joins Candace Browning, head of BofA Global Research, for a deeper dive on investing in today’s markets in “Midyear 2020: A Time of Challenge—and Opportunity.” Watch it for further insights.

 

 

Information is as of 07/24/2020 and subject to change.

 

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

 

Investing involves risk including possible loss of principal.

 

Companies may reduce or eliminate dividend payment to shareholders. Historically, dividends make up a large percentage of stocks’ total return.

 

Investing in growth stocks incurs the possibility of losses because their prices are sensitive to changes in current or expected earnings. Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the manager’s assessment of a company’s prospects is wrong, the price of its stock may not approach the value the manager has placed on it.

 

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not potect against loss in declining markets.

 

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 Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.

 

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

 

 

July 17, 2020

Forecast: Second-Quarter Earnings & Other Headwinds May Test the Markets

WITH SECOND-QUARTER EARNINGS KICKING OFF this week, investors may begin to see some renewed volatility in the markets, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. After several months of remarkable recovery, investment markets could face periodic challenges throughout much of the rest of 2020, he adds.

 

“We’re in stage four of an eight-stage investment cycle that started with the onset of the global pandemic,” Hyzy says. “While the latter stages of this investment cycle should lead to a new era of innovation and expansion, this current stage is defined by headwinds.” Headwinds include low second-quarter corporate earnings, nervousness over the November elections and fallout from the regional new outbreaks of the coronavirus across the southern United States.

 

For investors, the best course is to take a long-term view, avoid overreacting to periodic volatility and consider strategic investments, where appropriate, to prepare for a new economy ahead, Hyzy believes. Though the precise timing will depend on a number of factors, including progression of the disease, here’s how the eight steps of the investment cycle may play out:

 

“While the latter stages of this investment cycle should lead to a new era of innovation and expansion, this current stage is defined by headwinds.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Where We’ve Been
Stage 1 (March to mid-April): Impacted by the pandemic, business closings and job loss, equity markets plunge 30-40% from February. Massive government stimulus helps bring stability.

 

Stage 2 (Late April and May): Markets respond favorably as economic support for families and businesses creates a “bridge” to potential recovery.

 

Stage 3 (June): Many countries, regions and businesses begin to reopen, creating a series of sharp but narrow “V-shaped recoveries.”

 

Where We Are Now
Stage 4 (July through late 2020): As second-quarter corporate earnings are unveiled, they likely will reflect deep shocks from the pandemic, raising concerns about earnings for the rest of the year, Hyzy says. A contentious presidential election and new outbreaks of the coronavirus create challenges for the economy and markets, with the potential for periodic volatility.

 

Where We May Be Headed
Stage 5 (Late 2020 or start of 2021): “We think market expansion will resume, with some surprising areas of corporate profits as companies get better at managing their operating expenses,” Hyzy says. “But much depends on the levels of consumer confidence.”

 

Stage 6 (Early 2021): “We believe the markets will start pricing in that global expansion in Stage 6,” Hyzy says. “The growth engines will be the U.S. housing cycle and Germany and the rest of Europe supporting expansion rather than austerity.”

 

Stage 7 (Mid-2021): Depending on the election outcome, new government policies could create market challenges, Hyzy believes. The election outcome could also have implications for U.S.-China relations. And unemployment, though likely to be improved, may stall temporarily at about 6%.

 

Stage 8 (Late 2021): “The final stage of this early expansionary period is a pricing in of the new normal—including a longer term profit cycle,” Hyzy says. “That’s where new industries are born, innovation adds to productivity and the unemployment rate heads back towards levels we saw pre-pandemic.”

 

 

Information is as of 07/17/2020 and subject to change.

 

Investing involves risk including possible loss of principal.

 

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

 

Past performance is no guarantee of future results.

 

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.”).

 

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

 

 

July 10, 2020

Understanding Reflation—and Why It Matters

WITH THE ECONOMY STRUGGLING TO RECOVER amid an ongoing pandemic, the Federal Reserve (Fed) has committed to a steady process of “reflation"—stimulus aimed at returning a weakened economy back toward normal, healthy levels of growth and inflation. While such tactics are nothing new, “the current reflationary process may be the strongest we've seen in decades," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That could mean opportunities on several fronts for patient, strategic investors, Hyzy says.

 

“The Reflation Triangle," a new report from the Chief Investment Office, points to three reasons for optimism that we're entering a period of extended, controlled growth. First is the trillions of dollars of stimulus and liquidity the Fed, Congress and governments worldwide have unleashed to help markets, consumers and businesses. Second is a weakening dollar—good news for U.S. exports and a sign of renewed global economic confidence. Finally, a steepening yield curve—with interest rates for long-term bonds rising faster than for short-term bonds—may signal increasing market confidence in the economic recovery. 

 

“The current reflationary process may be the strongest we've seen in decades.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

What it could mean for investors 

Investors remain nervous about reentering the markets, especially for stocks, Hyzy says. “We're still seeing higher flows into bonds than stocks because the 'wall of worry' is still high." Yet investors may want to consider adding stocks and other assets with higher growth potential and greater risk as part of a well-diversified portfolio, he adds. Some investors may want to consider tangible assets such as real estate, timber or farm or ranch land.  “These could generate cash flow while providing a hedge against possible future inflation," he says.

 

It's important to recognize risks that could still derail a recovery and set back the reflation process. Top among these would be a major “second wave" of the pandemic. At the same time, he adds, “it's important to plan for what appears to be the early stages of a long-term global expansion."

Information is as of 07/10/2020

 

Investing involves risk including possible loss of principal.

 

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

 

Past performance is no guarantee of future results.

 

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 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.

 

Bonds are subject to interest rate, inflation and credit risks.

 

Nonfinancial assets, such as closely-held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not in the best interest of all investors.

 

 

June 26, 2020

4 Signs There May Be a New Bull Market on the Horizon

HISTORIC VOLATILITY BROUGHT AN 11-YEAR BULL MARKET to an end in March,1 but 2020 could mark the beginning of a new one. That’s not as counterintuitive as it may sound, says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. “New bull markets are born from the depths of despair, when it seems that all hope is lost.”

 

While millions remain unemployed and the coronavirus has yet to be eradicated, the economy offers reasons for encouragement. “May retail sales, released this week, were up 17.7% from April, much higher than the expected 8.8%,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Homebuilder sentiment posted its biggest monthly gain ever and manufacturing numbers are consistently moving up.”

 

“New bull markets are born from the depths of despair, when it seems that all hope is lost.” —Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank

 

Risks abound, interest rates and growth remain very low, and many investors are understandably bearish. Yet markets are responding favorably to the positive news. And the Federal Reserve has made clear its intention to continue providing liquidity while inflation remains at low to moderate levels—two keys to a sustained recovery, Mukherjee says. Here are four reasons he believes a long-term bull market may be on the way.

 

1. Oil bounces back. Since the epic collapse in April (when prices briefly went negative), oil prices have nearly doubled as motorists returned to the roads.

 

2. The dollar weakens. “The U.S. dollar has reversed its scorching rally from March,” Mukherjee says. “This is less about a loss of faith in the U.S. fiscal position and more a signal of stabilization and confidence in global growth.”

 

3. Stocks rally across sectors. Healthcare, technology and communications stocks have naturally led the way during the pandemic. But since mid-May, cyclical stocks such as industrials, financials and energy have improved as well, along with higher-risk small-cap and value stocks. “That’s a healthy sign in terms of overall market participation,” Mukherjee notes.

 

4. Corporate credit improves. “Companies have been able to issue record amounts of debt to shore up their balance sheets,” Mukherjee says. Access to credit has in turn reduced fears of widespread bankruptcies, he adds.

 

What could this mean for investors?

Another indicator of long-term market potential: bearish investors hold large sums of cash awaiting reinvestment. “More than $4.5 trillion of cash is parked in money funds that have not participated in the current rally,” Mukherjee says. The road ahead could be a bumpy period of “creative destruction,” he adds. “Declining business models will either shrink in market value, go out of business or be taken over to be fixed by stronger players. Ultimately, this should raise productivity for the broader economy.” Meanwhile, innovations in 5G and other technologies should prompt new waves of technology investment.

 

Yet despite the long-term potential a secular bull market may offer, individual investors should approach it with care. “We expect periodic volatility throughout the summer, given the number of risks that are out there,” Hyzy says. Threats include a major second wave of the virus, which could stall the reopening process and threaten economic recovery.

 

Maintain a diversified portfolio geared to your long-term goals, rebalance in response to volatility, and speak with your advisor about strategic ways to prepare for a possible bull market ahead, Hyzy advises. Adds Mukherjee: “Investors will have to be disciplined, nimble and focused on managing risks in order to capture these opportunities.”

 

For more on where markets and the economy may be headed next, tune in to the latest Merrill CIO Audiocast.

 

 

1 “Coronavirus Sell-Off Sends Plunging Dow Into Bear Territory After 11-Year Bull Market,” US News, March 11, 2020.

 

Information is as of 06/26/2020

 

Investing involves risk including possible loss of principal.

 

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

 

Past performance is no guarantee of future results.

 

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 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.

 

Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

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

 

 

June 19, 2020

Coronavirus & Climate Change:
Cleaner Air—But Stalled Solutions

AS DEADLY AS IT HAS BEEN, the coronavirus has given one undeniable (if temporary) gift to the planet: cleaner air. “The global economic shutdowns have sharply reduced the level of global greenhouse gas emissions this year,” says Joe Quinlan, head of CIO Market Strategy, Chief Investment Office for Merrill and Bank of America Private Bank. Levels of fine particulate matter in New York, Delhi, Sao Paulo and other major cities have dropped from 25% to as much as 60%, Quinlan adds.

 

“Climate change directly endangers the global economy, and mitigating risks remains a key objective of governments and corporations alike. We see it as an important long-term investment theme.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Near-term threats to climate-change solutions
Yet even as pollution-causing activity has been temporarily curtailed, the pandemic is disrupting efforts to reverse climate change and other environmental threats, according to a new Chief Investment Office report, “The Great Clash: The Crisis Doesn’t Stop Change.” Since the pandemic began, battered oil companies have decreased their low-carbon investments, hygiene concerns have driven a resurgence of single-use plastics, and nearly 600,000 U.S. clean-energy workers have lost their jobs.

 

“There’s no question the pandemic will cause some delays in environmentally friendly policies,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “But climate change directly endangers the global economy, and mitigating risks remains a key objective of governments and corporations alike,” he adds. “We also see it as an important long-term investment theme.”

 

Long-term investment themes to consider
Looking beyond the pandemic, investors may find some promising areas to consider, Quinlan says. Despite an expected downturn in 2020, wind and solar energy will likely continue the rapid growth they’ve experienced in recent years, he believes. Other promising areas for the post-coronavirus economy include:

  • Demand for electric vehicles, energy-storage capacity and cleantech goods and services is expected to rise, and next-generation batteries hold special promise, Quinlan says.
  • Look for a growing demand for green building construction, including both new buildings and retrofitting, as well as energy-efficient electronics, appliances and building systems.
  • Energy-efficient LEDs will become an ever larger force in residential and industrial lighting, Quinlan says.
  • Spending on water treatment and waste-management systems will likely rise, with special emphasis on irrigation, watershed management, filtration, drainage systems and desalination.

 

As with any investments, speak with your advisor about whether climate-change-related strategies make sense for your portfolio and long-term goals, Hyzy suggests. Either way, there’s little doubt that the need for solutions will continue to grow long after the coronavirus has gone away.

 

“This disease, like others, will likely be brought under control,” Quinlan says, “leaving it up to humanity to carry on the fight against climate change.”

 

For more insights, read “The Great Clash: The Crisis Doesn’t Stop Change” and tune in to the Merrill CIO Audiocast.

 

 

Information is as of 06/17/2020

 

Investing involves risk including possible loss of principal.

 

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

 

Past performance is not guarantee of future results.

 

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.”).

 

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

 

 

June 12, 2020

3 Signals That the Recession May Have Bottomed

AFTER MONTHS OF ECONOMIC DISRUPTION related to the coronavirus, the National Bureau of Economic Research made it official on Monday: The United States is in a recession that began in February.1 Yet on the same day, the S&P 500 climbed back to higher levels than at the start of 2020.2 What does that tell us? “Despite some of the biggest and sharpest economic declines on record and continuing volatility, we believe this recession has already reached its bottom,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Normally, that takes six months or more.”

 

“Despite some of the biggest and sharpest economic declines on record and continuing volatility, we believe this recession has already reached its bottom.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Bolstered by unprecedented government stimulus and Federal Reserve actions, the strong markets of the last few weeks also reflect encouraging U.S. economic news, including stabilizing employment figures and improvements in manufacturing, auto and home sales and consumer spending, he says. While serious challenges undoubtedly remain—most notably concerns about a potential resurgence of the pandemic, which helped to drive markets down on Thursday—Hyzy and the Chief Investment Office team are closely following some key market measures that provide reasons for optimism. Here are three:

 

Cyclical versus defensive stocks. Companies in industries such as manufacturing, real estate and financial services are especially subject to ups and downs in the economy. Recently, these “cyclical” stocks have outperformed “defensive” stocks known for stable earnings and dividends in any conditions, Hyzy says. “That’s a sign the economy has bottomed out and is turning for the better.”

 

Clues from the yield curve. Interest rates for long-term bonds have risen recently in comparison with those for shorter-term bonds, Hyzy notes. A steeper yield curve—at a time when rates overall remain at historic lows and many investors remain bearish—may project market confidence in the long-term economy, he adds. “This is something we’ll be watching closely.”

 

The 20-day spike. Short-term stock performance may offer evidence about the market’s long-term prospects. “One measure we watch is the 20-day spike. About 66% of the S&P 500 stocks hit new 20-day highs,” Hyzy says. “When that number is higher than 60%, it’s a sign of momentum and there’s a better than 90% probability that the market return for the next 12 months could likely be positive,” he adds.

 

How can investors respond?
While these and other measures are useful in gauging where the markets may be headed, rapid buying and selling based on short-term data can be risky and counterproductive, Hyzy says. Your advisor can help you interpret market data and determine what impact it may have on your long-term decisions, he adds. “We suggest a balanced, diversified portfolio based on your long-term goals.” Investors may want to consider strategically adding cyclical stocks to their portfolios, as well as growth and value investments, he says. At a time when interest rates remain low, bond investors may want to consider investment-grade corporate bonds.

 

 

For more on the outlook for economic improvement, tune in to the latest Merrill CIO Audiocast and read the latest CIO Capital Market Outlook.

 

 

1“Recession in U.S. Began in February, Official Arbiter Says “ The Wall Street Journal, June 8, 2020

 

2“Stock Market Today,” CNBC.com, June 8, 2020

 

Information is as of 06/12/2020

 

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 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 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.

 

 

June 5, 2020

Looking Ahead to a ‘New Frontier’ for Investors

IF HISTORY IS ANY INDICATION, the coronavirus pandemic will lead to a new era of technological progress and economic opportunity. “A look at the last 100 years shows that deep disruptions give way to innovation that benefits households, businesses and investors,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Often, it’s the very disruptions—whether disease, war or depression—that pave the way for creativity and growth, he adds.

 

“As we look to the other side of the pandemic, we anticipate a period of renewal driven by digitization, automation, new investment in healthcare infrastructure and other forces,” says Ehiwario Efeyini, Director and Senior Market Strategy Analyst, Chief Investment Office, Merrill and Bank of America Private Bank. For investors, Efeyini adds, “one of the main lessons from history is the importance of recognizing new trends that may be obscured by more immediate challenges.”

 

“We anticipate a period of renewal driven by digitization, automation, new investment in healthcare infrastructure and other forces.” —Ehiwario Efeyini, Director and Senior Market Strategy Analyst, Chief Investment Office, Merrill and Bank of America Private Bank

 

Innovations of the past
In the latest CIO report, “The New Frontier: A History of Economic Crisis and Recovery from 1918 to COVID-19,” Efeyini writes that people living through the culmination of World War I and the start of the Spanish Flu pandemic in 1918 may have seen little cause for optimism. Yet out of those events came sweeping advances in telecommunications, manufacturing, media, arts and entertainment. From 1920-29, global GDP grew at 4% * per year and stocks on the Dow Jones Industrial Average produced annualized returns of 21.2%.1 Similar recoveries followed shocks such as the Great Depression and World War II, the attacks of 9/11 and the global financial crisis of 2008-2009.

 

What’s likely ahead after coronavirus?
Similarly, the challenges of the current pandemic may lead to more automation and robotics in everything from manufacturing to retail, transportation, agriculture and food production, Efeyini says. “As one example, a renewed emphasis on hygiene will favor robots over humans in packaged food preparation.” We’re also likely to see greater use of medical technologies that support remote patient diagnosis and monitoring. And cloud computing adoption should grow due to increased reliance on telecommuting, distance learning and the need for ever greater data storage. Other areas of innovation include online retail and genomics, including advanced techniques for treating diseases.

 

Potential opportunities for investors
These developments may present long-term opportunities for investors in areas such as healthcare technology, biotechnology, pharmaceuticals, information technology and systems software, Hyzy believes. Other promising areas include communications services, internet and direct retail marketing. The new era favors large U.S. companies, he says. And while a well-balanced portfolio includes a variety of stocks, bonds and other assets, “a higher than traditional exposure to stocks will, in our view, position investors to potentially benefit from this new frontier.”

 

For more insights, read the “The New Frontier: A History of Economic Crisis and Recovery from 1918 to COVID-19” from the CIO and “The World After Covid” from BofA Global Research, and tune into the latest Merrill CIO Audiocast.

 

 

1Sources: Chief Investment Office, Maddison Project Database, Bloomberg. Data as of 2020.

 

*Average of U.S. and Western Europe. Equity return is Dow Jones Industrial Index price return to 1929 peak

 

Information is as of 06/05/2020

 

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.”).

 

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation.

 

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.

 

 

May 29 2020

What’s Behind the Markets’ Optimistic Outlook?

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.

 

For more insights, read the CIO report “The Great Convergence” and tune into the latest Merrill CIO Audiocast.

 

 

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.

 

 

May 21, 2020

What Reopening Could Mean for the Economy

DESPITE IMMENSE CHALLENGES facing many sectors of the economy, some encouraging signs suggest “green shoots” of a recovery that could begin as early as this summer, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. As all 50 states begin to take steps toward reopening after months of coronavirus-related lockdowns and consumer spending and unemployment slowly start to stabilize, “We fully expect the economy could begin to pick up in late June and July with a strong recovery in the fourth quarter,” he notes.

 

“We fully expect the economy could begin to pick up in late June and July with a strong recovery in the fourth quarter.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Among the encouraging signs: The Dow surged more than 900 points on Monday, in response to preliminary results from human trials of a vaccine that could potentially help the body’s immune system fight the coronavirus.1 Even after trillions of dollars in economic stimulus, in an appearance before Congress on Tuesday, Federal Reserve (Fed) chair Jerome Powell emphasized the Fed’s ongoing commitment to supporting economic recovery.

 

There’s no doubt that many obstacles remain and economic recovery could still face setbacks, especially if coronavirus rates spike and certain states are delayed on the road to fully reopening. “Everything depends on solutions to what is, first and foremost, a devastating global health crisis,” Hyzy notes. But the following data points are evidence of economic resilience. The Chief Investment Office will be watching them closely in the weeks to come.

 

Unemployment. Weekly jobless claims released May 21 totaled nearly 2.4 million.2 Yet continuing claims—workers already unemployed and receiving ongoing benefits—have leveled off, Hyzy says. “That means workers coming back into the economy, whether temporary or full-time, are at the same levels as those going out. We’ll be watching this closely as economic re-openings continue.”

 

Consumer spending. “Those employment trends match up well, in our view, with the fact that the consumer has begun to stabilize,” Hyzy says. Despite the April sales numbers and ongoing weakness in battered areas such as travel, leisure and entertainment, “spending in the last couple of weeks hasn’t just evened out, it has risen. Even airlines have shown a modest increase in bookings recently.”

 

Capital spending. Companies will have to adjust and accommodate to new ways of doing business, Hyzy believes. Remote work, social distancing and other changes call for new capital investments. “This could be one of the more robust economic catalysts as we head towards the middle part of 2021 and beyond,” he says.

 

What can investors consider doing?

To help position themselves for the recovery, investors may want to consider stocks of large, well-established U.S. companies, Hyzy says. Promising areas include technology, healthcare and communications services, as well as companies focused on innovations for consumers, among others. With low interest rates likely to persist even during the recovery, investors may want to compensate for low yields from Treasury bonds with high-quality corporate bonds or dividend-paying stocks, he adds.

 

For more on what’s ahead for the markets and the economy, and how to prepare, listen to the latest Merrill CIO Audiocast .

 

 

1“U.S. Stocks Surge as Hopes for Coronavirus Vaccine Build,” The Wall Street Journal, May 19, 2020

 

2“Jobless claims total 2.4 million, still elevated levels but a declining pace from previous weeks,” CNBC.com, May 21, 2020

 

Information is as of 05/21/2020

 

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 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 Lynch Wealth Management 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.”).

 

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.

 

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.

 

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.

 

This material does not take into account your 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, financial instrument or strategy. Before acting on any information in this material, you should consider whether it is in your best interest for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are correct only as of the stated date of their issue.

 

 

May 15, 2020

10 Post-Coronavirus Trends & the Investment Opportunities They Could Create

EVEN AFTER LOOSENING ITS GRIP, the coronavirus will leave indelible marks on society. “It’s going to change how we think, live, work, learn, shop, travel and entertain,” says Kathryn C. McDonald, Vice President and Market Strategy Analyst, Chief Investment Office, Merrill and Bank of America Private Bank.  “History has shown that past disruptions of this magnitude, as painful as they can be, have often also boosted resourcefulness, productivity and innovation,” adds Joe Quinlan, head of CIO Market Strategy, Chief Investment Office for Merrill and Bank of America Private Bank.

 

“The coronavirus is going to change how we think, live, work, learn, shop, travel and entertain.” —Kathryn C. McDonald, Vice President and Market Strategy Analyst, Chief Investment Office, Merrill and Bank of America Private Bank

 

The primary effect of the coronavirus pandemic will likely be to greatly accelerate the pace of existing trends, such as remote work, e-learning, healthcare technology and rising public debt, believe McDonald and Quinlan. A new Chief Investment Office (CIO) report, “The Great Acceleration,” authored by the two of them, lays out 10 major trends, as well as some of the long-term investment opportunities—and risks—they could create. “As you consider investment strategies and your asset allocation strategy for the recovery ahead, your advisor can help you determine what these ideas might mean for you,” says Quinlan.

 

1. De-globalization. Global supply chains are shifting away from China and becoming more local, with more reliance on automation and robotics.

Investment considerations: Potential opportunities in automation, robotics, 3-D printing and precision agricultural machinery.

 

2. The E-everything economy. The digital revolution is expected to speed up amid rising demand for telemedicine, e-commerce, e-learning and mobile banking, among others. 

Investment considerations: Companies providing these services, as well as delivery drones and virtual reality, could prosper.

 

3. Next-gen tech infrastructure. A rise in remote work has underscored the need for better telecommunication infrastructure.

Investment considerations: Promising areas include 5G telecom networks, fiber optics infrastructure, cloud-based services and related activities.

 

4. Expanded government spending. Trillions of dollars in government stimulus have been crucial in addressing public health needs and limiting economic devastation. 

Investment considerations: Higher government spending could spur future inflation, potentially benefiting real assets, such as commodities, and inflation-indexed bonds.

 

5. Widening inequality. The crisis has exacerbated already growing gaps in income, wealth, health and digital access, with calls for greater redistribution of wealth.

Investment considerations: A larger share of income for workers, to narrow those gaps, could put pressure on corporate margins.

 

6. Health-care infrastructure and innovation. The virus has exposed deficiencies in global health-care systems already under pressure from aging populations and chronic diseases.

Investment considerations: Opportunities in pharmaceuticals, vaccines, medical software and hardware, and related medical goods and services.

 

7. Biosecurity and smart cities. The need to monitor health and track and contain future diseases should accelerate the trend toward smart cities, while intensifying the debate over privacy.

Investment considerations: Greater potential demand for biosecurity hardware, artificial intelligence and related technologies.

 

8. Cybersecurity. Cyber-attacks have skyrocketed amid greater internet use from remote locations, leading to increased spending on data protection by government agencies, schools and corporations.

Investment considerations: Could benefit hardware and software makers, data management firms, defense contractors and IT service providers.

 

9. Increased consumer and business savings. Consumer debt, already low before the crisis, may dip further as people err on the side of caution. Companies, too, could cut back, no longer issuing debt to buy back shares.

Investment considerations: Higher savings rate could hurt consumer stocks and benefit high-quality growth stocks.

 

10. Artificial intelligence (AI) in disease prevention and health care. AI applications may enable faster, more accurate disease tracking, medical diagnosis and treatment and vaccine discovery.  

Investment considerations: Should benefit large technology companies as well as health-care and artificial intelligence innovators.

 

 

Listen to the Merrill CIO Audiocast and read “The Great Acceleration: Speeding Toward a Post-Coronavirus World” for more insights on these trends.

 

 

Information is as of 05/15/2020

 

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 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 Lynch Wealth Management 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 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.

 

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.

 

 

May 8, 2020

3 Investing Strategies to Consider for the Recovery Ahead

THOUGH THE PANDEMIC CAME ON with breathtaking speed, recovery will be slower—as evidenced by today’s Labor Department announcement that the unemployment rate hit 14.7%, with 20.5 million Americans losing their jobs in April.1 “The sharp weakness in the job market comes on the back of a record increase in jobless claims since the crisis began,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Yet recent signs of financial market stability suggest that investors see grim employment numbers as a painful but expected “pass-through” phase on the way to a recovery that could start in late 2020.

 

Recovery will likely bring fundamental shifts in the global economy and behavioral changes among consumers and corporations, says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. “Investment portfolios will have to adapt.” A new Capital Market Outlook report from the Chief Investment Office (CIO) offers three strategies for long-term investors to consider. “Your advisor can help you evaluate whether any—or all three—might make sense for you,” adds Hyzy.

 

“We believe a large domestic consumer base, natural resources, education, healthcare, skilled labor and innovation help create advantages for U.S. companies.” —Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank

 

#1: Big companies and growth industries
Rationale: Research suggests that, going back to the 14th century, pandemics typically have been followed by extended periods of low interest rates, Mukherjee notes.2 Low rates generally create favorable conditions for stocks—especially of large companies and those in industries poised for growth, he adds. As millions of Americans buy, work, learn and visit their doctors remotely, opportunities may include healthcare technology, e-commerce and internet technology, among others.

 

#2: High-quality dividends and corporate bonds
Rationale: “Following periods of deep economic stress, personal savings have historically increased as households have rebuilt wealth,” Mukherjee says. With low rates limiting income from U.S. Treasuries, investors may find stronger income potential (albeit with added risk) from investment grade corporate bonds of modest duration, or from dividend-paying stocks.3 “Nearly 400 companies on the S&P 500 are offering dividends higher than the yields for 10-year Treasuries,” he adds. A risk to consider: as of May 4, 85 companies on the S&P 1,500 had cut dividends—with more dividend cuts likely to follow. To help mitigate that risk, you could avoid hard-hit industries such as travel and seek large companies with strong balance sheets, he suggests.

 

#3: U.S. stocks over international
Rationale: Compared with their counterparts in international developed and emerging markets, “large U.S. companies have historically tended to have stronger fundamentals, including higher return on equity, profit margins and earnings growth,” Mukherjee says. While U.S. stocks are relatively more expensive, they can likely make up that difference as the pandemic eases. “We believe a large domestic consumer base, natural resources, education, healthcare, skilled labor and innovation help create advantages for U.S. companies,” he says.

 

For more insights from the Chief Investment Office on ways to prepare your portfolio for what may lie ahead, read the May 4 Capital Market Outlook and listen to the Merrill CIO Audiocast.”

 

1“U.S. Jobs Report Shows Clearest Data Yet on Economic Toll: Live Updates,” The New York Times, May 8, 2020.

2“Longer-Run Economic Consequences of Pandemics,” Federal Reserve Bank of San Francisco as of March 2020.

3Corporations may determine to not pay dividends based on market circumstances.

 

Information is as of 05/08/2020

 

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

 

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

 

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 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.

 

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.

 

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.

 

This material does not take into account your 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, financial instrument or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are correct only as of the stated date of their issue.

 

 

April 29, 2020

Why Consumers Hold a Key to Recovery

CONSUMERS DRIVE THE U.S. ECONOMY. That basic fact has never been clearer. “They represent 70% of U.S. gross domestic product (GDP) and a large share of global GDP,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. And though consumers have been and continue to be deeply affected by the coronavirus crisis, their inherent resilience is essential to an economic recovery that could begin by the fourth quarter of 2020, according to “The Great Separation,” a new report from the Chief Investment Office.

 

The recovery is likely to be “U-shaped”—meaning it may kick in only after several more months of low growth and economic uncertainty. And everything hinges on signs that the health crisis is truly turning in a positive direction. Yet thanks to rapid and massive U.S. financial and fiscal stimulus (totaling $7.5 trillion so far, or nearly half of the global total of $15.86 trillion), the economy and consumers have a firm basis on which to rebuild their confidence, Hyzy believes.

 

“Signs of stabilization have emerged. Credit card spending has recently shown resilience, and consumers were generally in a healthy place prior to the crisis.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

 

Getting to recovery
Any talk of renewed confidence must start with sobering numbers. As the virus swept throughout the United States and businesses shut down, weekly jobless claims surged to 6.9 million for the week ending March 28, ten times the high during the global financial crisis of 2008 and 2009, Hyzy says. With millions of Americans staying home, spending on hotels dropped 68% from February to March, clothing by nearly 40% and restaurants by nearly 34%.

 

“But signs of stabilization have emerged,” Hyzy says. “Credit card spending has recently shown resilience, and consumers were generally in a healthy place prior to the crisis,” he notes. U.S. savings measured 8.2% in February, compared with an average of 4.6% in the years prior to the global financial crisis. “Higher savings could be cushioning some consumers through this recession,” he says. The recovery process, he adds, may run from the fourth quarter of 2020 through the first quarter of 2021.

 

Unleashing pent-up demand
That cushion may help propel a wave of consumer spending as virus fears ease, stay-at-home guidelines are lifted and Americans en masse seek to recapture a semblance of normal life. Hyzy believes this “pent-up demand” phase could start in earnest in the second quarter of 2021 and continue for the rest of that year. “For millennials, pent-up demand could mean buying homes for the first time as they look to start families and their spending power rises,” Hyzy says. For consumers of all ages, it could mean moving ahead with delayed purchases of furniture, clothes and cars. Hyzy points to China, where auto sales jumped by 366% in March as its economy began to reopen.

 

What can investors consider?
Investors, like consumers, may experience their own pent-up demand once the recovery takes hold. Amid the recent volatility, investors have fled to cash, with money market holdings currently valued at $4.5 trillion. “That’s higher than the entire market capitalization of the Eurozone,” Hyzy says.

 

Many investors are likely to return to stocks when volatility subsides, he adds. Large U.S. companies may be attractive, along with e-commerce and e-sports. Technology and healthcare are other promising sectors. At the same time, Hyzy emphasizes the importance of investing in a diversified portfolio based first on your long-term goals.

 

To learn more about the forces likely to drive economic recovery, read the Chief Investment Office report “The Great Separation.”

 

 

Information is as of 04/29/2020

 

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

 

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

 

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

 

 

April 22, 2020

Why Did Oil Prices Collapse, and When Could They Recover?

EVEN IN A WORLD THAT HAS GROWN ACCUSTOMED to the possibility of negative interest rates, the idea of negative oil prices—paying people to buy oil—seems almost unfathomable. Yet that’s what happened on Monday, when West Texas Intermediate (WTI) oil prices dropped to nearly minus $40 per barrel before climbing back into positive territory by Tuesday morning. Still, the precipitous decline was enough to spark volatility, impacting not just the shares of energy producers but the broader market overall.

 

While lower energy prices are usually good news for consumers, the current state of oil prices is a reflection of the massive disruption to people’s lives caused by the coronavirus, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “The massive oil supply glut is driven by the sharpest-ever contraction in demand. There’s nowhere to store oil right now, and nobody wants to take delivery.” 

“The massive oil supply glut is driven by the sharpest-ever contraction in demand. There’s nowhere to store oil right now, and nobody wants to take delivery.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

What’s likely ahead for energy and the economy?
Economically speaking, this has been called a crisis of mobility, says Hyzy. “We’re not traveling to work, to hotels, to restaurants or on business trips.” Recovery for the oil industry and the broader economy hinges on when governments and individuals decide that it’s safe to start moving again, he adds. Hyzy outlines three possible scenarios below:

  1. The health crisis eases to the extent that stay-at-home restrictions can be lifted for many Americans in May. If so, consumer confidence and oil demand could return to pre-coronavirus levels by 2021.
  2. Even as the health crisis eases, people’s behavior may fundamentally change. “It could be that we’ve all gotten used to less travel, and demand is reset at a lower level,” Hyzy says. Recovery, then, could be lower and slower.
  3. A third scenario—and the riskiest, in Hyzy’s view—is that when people begin to move freely again the virus returns with a vengeance, resulting in a series of “rolling lockdowns.” The unpredictability of that scenario, and the damage to consumers, could stall hopes of a recovery for an extended time, he says.

 

To ease the current historic glut, oil producers are likely to shut down supply for May and June, Hyzy believes. In the months to come, oil prices will have to climb back to about $50 per barrel to at least cover the cost of production, he says. That could happen either through renewed demand or, if recovery stalls, through industry consolidation, as many smaller producers are forced out of the market.

 

What can investors consider?
We anticipate an extended period of recurring volatility as declining oil prices and other economic impacts of the coronavirus resolve themselves, says Hyzy. With so much uncertainty regarding both the health crisis and the economy, he suggests maintaining a portfolio diversified both across and within multiple asset classes. He also recommends focusing on high-quality investments, particularly in large U.S. companies that pay dividends, and on rebalancing to make sure portfolios stay invested towards long-term goals.

 

 

For the latest insights from our CIO, read “Oil Price Collapse Q&A: When Economics, Storage Logistics and Desperation Coalesce” and listen to the Daily CIO Audiocast.

 

 

Information is as of 04/22/2020

 

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

 

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

 

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 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.

 

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.

 

 

April 16, 2020

A Timeline for Economic Recovery

FOR ALL OF THE UNCERTAINTY related to the coronavirus and the economy, a path to eventual recovery is becoming clearer, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. But considering the impact to people’s health, as well as to jobs, businesses and investor confidence, the process won’t be easy or quick, he cautions.

 

Everything depends on a breakthrough in a pandemic still gripping the United States and the world. “Science is what gets us back to the ‘new normal’,” Hyzy says. Assuming progress on that front, a new Chief Investment Office (CIO) report, “Over the Bridge to the Other Side,” outlines how a gradual but steady progression back to economic strength and reduced market volatility could unfold over the next couple of years. The report maps out the following potential timeline.

 

“We’re forecasting real economic growth of 30% for the U.S. in the 4th quarter of this year and 6.1% in 2021.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Over the Bridge (2nd and 3rd Quarters of 2020)
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed in late March, provided $2 trillion to help households, small businesses, state and local governments and corporations weather the crisis. In addition, stimulus programs by the Federal Reserve have pumped about $1.6 trillion into financial markets in the past month, and the total could reach $2 trillion—or 10% of U.S. GDP. “Policy makers are likely to consider additional stimulus measures as necessary to boost recovery,” Hyzy says.

 

To the Other Side (4th Quarter 2020 into 2021)
While financial markets will likely recover relatively quickly once the stimulus takes full effect, the wider economy will take more time, Hyzy believes. After the steep plunge and bottoming out, a “U-shaped” recovery should begin as consumer confidence slowly returns. “We’re forecasting real economic growth of 30% for the U.S. in the 4th quarter of this year and 6.1% in 2021,” he says.

 

Pent-up Demand Boosts Economic Growth (2021-2022)
As virus treatments improve and progress towards a vaccine possibly accelerates, economic growth should gather momentum. “When people gradually become less tentative about engaging socially, we could see a surge in pent-up demand next year and into 2022,” Hyzy says.

 

The New Frontier (2022-2025)
Even a full recovery won’t bring back the same economy or the same world, Hyzy notes. “New behaviors will cement themselves into daily consumer and business life and new industries will be born,” he says. In years to come, investors may find opportunities in technological innovation, from automation and robotics to e-sports, e-entertainment and more. We’ll also likely see a rise in health care spending around the world and redrawn global supply chains, especially for pharmaceuticals, Hyzy says.

 

Risks That Could Alter the Journey
While every economic crisis contains uncertainties, the coronavirus represents new and uncharted territory. “Never before have major economies been deliberately shut down to bring a health crisis to manageable proportions,” Hyzy says. If the “curve” of new cases steepens rather than flattens, consumer confidence remains depressed, or the battered energy market helps generate a credit crisis (among other risks), the recovery could take longer than expected.

 

What Can Investors Consider?
As the markets approach bottom, investors can consider rebalancing affected portfolios. This may include using “dollar cost averaging”—which can reduce the effects of volatility by stretching asset purchases over time. With volatility expected to continue for a while, investors may also want to consider active rather than passive portfolio management1, since active managers seek to outperform benchmarks, Hyzy says.

 

Diversifying portfolios across assets classes and within individual asset classes remains a priority. Hyzy recommends large, high-quality U.S. companies. Given extremely low interest rates, investors may find better yields through dividend-paying stocks rather than bonds. Yet bonds remain important to mitigate risk in a portfolio, he adds.

 

 

For more information, read the CIO report “Over the Bridge to the Other Side,” and tune in to the Daily CIO Audiocast at 2 P.M. (ET) every weekday afternoon.

 

1 Active management seeks to outperform benchmarks through active investment decisions, such as asset allocation and investment selection. Passive management seeks to outperform benchmarks by making tactical allocation decisions and mirrors the returns of asset classes within the portfolio.

 

Information is as of 04/16/2020

 

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

 

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

 

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, dollar cost averaging and rebalancing 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.

 

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.

 

 

April 8, 2020

When Could the Markets Recover? 5 Signs to Watch

BEFORE THE MARKETS CAN RECOVER from the massive downturn created by the coronavirus, they need to “find a bottom,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That process is already well underway, he adds, with significant progress being made on three of five fronts. “We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.”

 

Of course, everything still depends on finding answers to the health crisis that continues to threaten the lives of millions across the world, Hyzy adds. And considering the number of jobs lost and businesses shuttered, recovery will be slow, with GDP growth unlikely to return until 2021.

 

Below, Hyzy offers a progress report on the signs the CIO is watching that may indicate the markets may be reaching their bottom and could turn the corner towards recovery.


A mother working on a laptop and a child reading a picture book

“We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

 

Sign #1: Capital flows more freely. Amid a wave of panic selling by investors in March, the Federal Reserve (Fed) promised to buy unlimited amounts of government debt and lend money to local governments and businesses to help keep capital markets from drying up. Such policies appear to be working, Hyzy says. “Capital is flowing more freely and fixed income markets are acting in a more stable manner, even as we speak.”
✔ Status: Underway

 

Sign #2: Stock-bond relationship normalizes. In normal market conditions, bond prices tend to rise as stock prices fall, and vice versa, so having both in a portfolio helps mitigate risk. In March, bonds and stocks dropped in tandem as investors sold them in search of cash. With stimulus helping to stabilize bond markets, the inverse relationship between stocks and bonds is returning—a key sign of market stability, Hyzy says.
✔ Status: Underway

 

Sign #3: Volatility eases. “Market volatility went above 80 in mid-March, the highest on record,” Hyzy says—as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The March 16 closing of 82.69 was higher even than the 80.86 level in November 2008, at the onset of the financial crisis.1 “Currently, the VIX has fallen below 50,” Hyzy notes. “More importantly, it has fallen on days when markets are down.”
✔ Status: Underway

 

Sign #4: U.S. dollar weakens. Amid a global scramble for less risky currencies, the dollar has shot up in value during the current virus crisis. “This can hurt the economies and finances of emerging market countries, given their high exposure to U.S. debt, and delay the eventual recovery overseas,” Hyzy says. “Though there are signs the dollar may be cresting, we need to see some consistent weakening.”
✔ Status: Needs improvement

 

Sign #5: Bad news is taken in stride. One crucial sign of stability is when markets have already factored in the effects of the coronavirus on the economy and can absorb daily developments without panicking, Hyzy believes. “We’ve seen this sporadically, but it needs to be more consistent.”
✔ Status: Needs improvement

 

What can investors consider doing now?
The recovery, when it comes, will likely reveal an economy forever changed, Hyzy notes. We’ll see a world focused on localization rather than globalization, where technology and remote work take precedence. “It’s going to be ‘e-Everything,’ from our perspective—e-Learning, e-Medical, e-Sports, e-Social interaction and e-Work,” he says.

 

In the meantime, as the economy and markets find bottom, “quality, yield and growth are three factors to continue to emphasize,” Hyzy says. That may include stock and bond investments in large, well-run U.S. companies, he adds.

 

For latest insights on the markets and the economy, listen to the Daily CIO Audiocast.

 

 

1“VIX Index Historical data,” CBOE Volatility Index

 

Information is as of 04/08/2020

 

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

 

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

 

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 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 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.

 

 

April 3, 2020

What Do the Q1 Numbers Tell Us About the Rest of the Year?

 

THE FIRST QUARTER OF 2020, launched amid economic growth, broad optimism and low unemployment, ended on Tuesday, having set records that few could have foreseen. “The Dow Jones Industrial Average and the S&P 500 finished their worst quarter ever, down 23% and 20%, respectively,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

 

With the virus continuing to spread and nearly 10 million Americans filing jobless claims in the past two weeks alone, it’s possible a full recovery may not come about until the end of 2021. “To put it bluntly, in April and possibly May the financial markets and economy are likely to see some of the sharpest downturns in history as the shutdown takes full effect,” Hyzy says. But, he adds, “It’s important to remember what’s driving the downturn. This is a health-care crisis; before it began, the fundamentals of our economy were strong.”

 

What could the next three quarters bring?
With travel curtailed and millions of Americans confined to their homes, it’s no surprise that spending on airlines, hotels and restaurant visits has plunged. “But we’re also beginning to see much lower spending on other types of discretionary purchases, things like clothing and furniture,” says Michelle Meyer, head of U.S. Economics, BofA Global Research. “Consumers are much more concerned right now about their finances and health, and much less willing to spend.”


A mother working on a laptop and a child reading a picture book

“Consumers are much more concerned right now about their finances and health, and much less willing to spend.” — Michelle Meyer, head of U.S. Economics, BofA Global Research

 

As a result, U.S. GDP is likely to shrink by 30% during the second quarter on an annualized basis, Meyer says. GDP will likely contract by a cumulative 10.4% over the first nine months and then recover somewhat in the fourth quarter to finish full-year 2020 with GDP growth of -6%.  “That would be the steepest recession on record and nearly five times more severe than the average of all recessions since World War II.”

 

What are the longer-term prospects?
While we’re undoubtedly looking at an arduous recovery ahead, the trillions of dollars in stimulus programs by the Federal Reserve and Congress have prevented a bad situation from becoming much worse, says Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research. “We expect companies will work out their bad news during 2020,” she says. And while earnings aren’t likely to return to pre-coronavirus levels until 2022, “we’re anticipating earnings growth in the range of 25% to 35% for 2021. That’s a pretty strong recovery.”

 

What can investors do now?
As the economy and markets begin to bottom out in the weeks ahead, investors who avoid panic selling may find opportunities to rebalance their portfolios and invest towards an eventual recovery, Hyzy says. Still, everything depends on answers to the question the whole world is asking: When will the health crisis ease? “Science is what gets us back to a new normal,” he adds.

 

For more insights, read “Whatever It Takes: The U.S. Policy Response to COVID-19,” from the Chief Investment Office, and tune in to the Daily CIO Audiocast.

 

Information is as of 04/03/2020

 

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

 

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

 

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.”).

 

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.

 

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 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.

 

 

 

April 1, 2020

 

What You Need to Know About the IRS Tax Extension

 

TO HELP TAXPAYERS WEATHER THE ECONOMIC IMPACT of the coronavirus, the IRS has postponed the traditional April 15 federal income tax filing and payment deadline by three months to July 15. “During the three-month postponement, taxpayers won’t be subject to interest or penalties for filing after April 15,” says Mitchell Drossman, National Director of Wealth Planning Strategies for the Chief Investment Office of Merrill and Bank of America Private Bank.

 

A recent report by the Chief Investment Office, “Tax Alert 2020-02: Tax Payment and Filing Deadlines Postponed in Response to Pandemic,” answers some key questions you may have about the extension and your personal taxes. The IRS continues to issue guidance on taxpayer relief, so please check with the IRS’s Filing and Payment Deadlines Q&A site for the very latest information. As always, it’s best to consult your tax advisor for guidance on what the tax extension might mean for you.

 

during the three month postponement, taxpayers won't be subject to interest or penalties for filing after april 15th

 

Who qualifies for the postponement?
The relief applies to any taxpayer with federal tax returns or payments usually due on April 15. That includes individuals, trusts, estates, partnerships, associations, companies and corporations. There are no limitations on the amount of tax that may be postponed, and taxpayers do not need to make a formal request in order to take advantage of the postponement.

 

What tax filings and payments are or aren’t covered?
The provision applies to all 2019 federal income taxes and self-employment taxes. Self-employed people may also postpone paying their estimated quarterly taxes for the first quarter of 2020, normally due on April 15, until July 15. But self-employed taxpayers should keep in mind that their estimates and payments for the second quarter will still be due on the usual date of June 15.  

 

In addition, IRS Notice 2020-20 automatically postpones the traditional April 15, 2020, deadline for filing gift and generation-skipping transfer tax returns and making payments of gift and generation-skipping transfer tax to July 15, 2020.

 

Does this mean more time to contribute to an IRA or Health Savings Account?
Yes, in FAQs at its Filing and Payment Deadlines Q&A site the IRS states that the deadlines for 2019 contributions to IRAs and health savings accounts are extended from April 15 to July 15. (The IRS site cautions that the answers to its FAQs are not citable as legal authority.)

 

Are state and local taxes postponed as well?
“States generally follow the federal due dates, but it’s best to check with your individual state,” Drossman says. While many states have already announced plans to extend their filing and payment deadlines to July 15, 2020, a few have not yet announced extension plans.

 

Can taxpayers file for an automatic extension beyond the July 15 deadline?
Taxpayers have traditionally been able to request a 6-month tax filing extension by submitting the proper paperwork by April 15—a move that’s particularly useful for filers whose taxes are complex. However, they’ve still been required to pay their taxes by April 15. Under this year’s tax postponement, the deadline for requesting this extension is now July 15. If the extension form is filed by July 15, 2020, taxes will be owed on July 15, 2020, and the tax filing deadline becomes Oct. 15.

 

Is there any reason not to take advantage of the federal extension?
If you believe you have a refund coming this year, filing your return on April 15 rather than taking the postponement could mean that you receive it sooner. Whatever your situation, it’s important to speak with your tax advisor before making any decisions.

 

 

Check back for regular updates on this page, and tune in to our Stay Daily CIO Audiocast for latest insights on the coronavirus and the economy.

 

Information is as of 04/01/2020

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.

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.”).