Midyear Outlook: Turning volatility into opportunity

 

 

Hosted by:

Chris Hyzy

Chief Investment Officer,

Merrill and Bank of America Private Bank

 

Featuring:

Ian Bremmer

President of Eurasia Group and GZERO Media

 

Savita Subramanian

Head of U.S. Equity & Quantitative Strategy

And Head of ESG Research,

BofA Global Research

 

Michael Gapen

Head of U.S. Economics,

BofA Global Research

 

Joe Curtin

Head of CIO Portfolio Management, Chief Investment Office

Merrill and Bank of America Private Bank

 

Marci McGregor

Senior Investment Strategist, Chief Investment Office

Merrill and Bank of America Private Bank

 

 

 

Please listen to important information at the end of this program.  Recorded on July 11, 2022.

 

 

 

 

 

 

CHRIS HYZY:

Hello, and welcome to this edition of the Merrill Perspectives podcast. I'm Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

 

This podcast is an audio version of a webcast I hosted called Midyear Outlook: Turning volatility into opportunity.  In it I speak with a number of experts about what the remainder of 2022 could bring for economy and the markets. And we discuss how investors can make sense of the many changes we've been experiencing during the first half of the year.

 

Up first, I speak with Ian Bremmer, president of Eurasia Group and GZERO Media about some of the major geopolitical events and trends he's watching.

 

Next, I speak with two experts with BofA Global Research, Savita Subramanian, head of U.S. Equity and Quantitative Strategy and head of ESG Research, and Michael Gapen, head of U.S. Economics. Following a rough start to the year, we discuss where the economy and the markets could be headed next.

 

For the final segment, I'm joined by two of our top market strategists with the Chief Investment Office, Marci McGregor, senior investment strategist and Joe Curtin, head of CIO Portfolio Management. Together we offer investment insights and ideas you could consider now.

 

You can also watch the webcast version of this program on ml.com.

 

With that, let's go to my discussion with Ian Bremmer.

 

CHRIS HYZY:

Ian, what a great time to talk about the geopolitical landscape. And as we sit here at the midyear, so many developments have happened. The Euro at a 20-year low. The yen at a 24-year low. The energy equation in Europe really not changing, in fact, getting worse. You've got the situation with the political landscape in the UK. You've got the midterm elections coming, the extended crisis in Ukraine.

 

How do you see the developments going forward throughout the rest of this year, and what's the landscape look like over the next couple of years?

 

IAN BREMMER:

It is enormous geopolitical volatility, because we have entered into a new Cold War with elements of hot war between the West and Russia, and Russia is being forcibly decoupled from the West. They are going to be very unhappy about it and as the Ukraine war stabilizes a bit, we'll talk less about Ukraine and more about that broader confrontation.

 

A little bit of good news is that the U.S.-China relationship and the West-China relationship is actually a lot more stable than that. Neither of those sides are looking for confrontation, given how much uncertainty there is in everyone's economic trajectory right now. So not only is it not a near term war in Taiwan, but frankly, the biggest news that might come out of the U.S.-China relationship this whole year is probably going to be some reduction in the Trump-era tariffs which will be reciprocal from the United States and China. That's very different from the kind of rhetorical confrontation that you're seeing between the Americans and Chinese politically.

 

CHRIS HYZY:

So let's go and dig in a little bit more towards the Russia-Ukraine situation. How does this end? Does it end?

 

IAN BREMMER:

I would first say that in the near term, next few months, the Russians and the Ukrainians are going to be exhausted in terms of their capabilities of the troops that are fighting each other on the ground. The Russians could have opted to engage a general mobilization that would have been very unpopular back at home in Russia.  They chose not to. So there's only limited numbers of additional troops that can support what they have in the field right now.

The Ukrainians are desperately trying to get a lot more high-capability artillery and ammunition. It's been slow, in part because you've got to train the Ukrainians; in part because there's only so much surplus that comes from NATO and in part because some of the NATO allies are just reluctant to do an awful lot.

 

So you put those two things together. What that really means is that Ukraine itself, the Russians, in a narrower confrontation are taking additional land. They will move towards annexing it.  There is no breakthrough negotiation, but it does feel like a more frozen conflict, a more frozen war in the next six months than it did in the first four.

 

But as I intimated before, none of that in any way, makes for an easier relationship between Russia and the West and here I'm talking about Europe, the U.S., Canada, even countries like Japan and South Korea. They are cutting the Russians off. They're freezing Russian assets. The Russian economy, which will contract some 10% this year, will get worse in coming years, as no one needs them anymore from the developed world.

 

The developing countries will still do food business with them, fertilizer and energy. But that's not enough to keep the Russian economy working. Especially because this historically has been a manufacturing economy, an industrial economy, a defense and arms producing economy.  Those things will fail. And talented Russians by the hundreds of thousands are leaving the country and are not coming back so that human capital is gone, too. And the world has never done this to a G-20 economy. It's never happened before. Never mind a G-20 economy with 6,000 nuclear warheads.

 

So what we are looking at, Chris, going forward over the next six months is absolutely more confrontation between Russia and an expanded and strengthened NATO, with Finland and Sweden joining.  With 2% German defense expenditure. With 300,000 highly capable, ready deployed troops over the next 12 months, as opposed to 40,000 before the war.

 

The Russians will respond to that with expanded espionage, with cyber-attacks, with expanded disinformation and with more military confrontation and you know, sort of testing across borders. So this is bringing us back to the days of the Cold War with a Russia that is much less capable, but also feels much more humiliated. And that's an unprecedentedly geopolitically dangerous environment, specifically for the European continent.

 

CHRIS HYZY:

Take us through the thoughts now about the concept that everyone talks about as de-globalization, but isn't it really re-globalization or a shift in what that actually means?  And then ultimately, how does the U.S. and Europe keep China somewhat at bay?

 

IAN BREMMER:

Well, they're there are two ways to look at this: one from the security perspective.  The old Iron Curtain divided Europe in two, between East and West. The new Iron Curtain is actually uniting Europe. I mean, even Ukraine has just been given candidate membership into the European Union, which means that the EU is formally, formally accepting that they are going to be at war with Russia, because Ukraine will be a part of the European Union and that will guarantee that the EU will provide more institutional, economic and even defense support to the Ukrainians.

 

Yes, it will take 10, 15 years for the Ukrainians to formally join, but simply that process really matters in terms of the orientation of Europe towards Russia.  So that from a security perspective, we have a stronger, more integrated Europe, more aligned NATO, and during the most recent Madrid Summit, NATO Summit, not only was that about the NATO members, but you also had for the first time ever the Japanese Prime Minister, the South Korean president, in addition to the New Zealanders and the Australians, all joining the summit.

 

Increasingly, we're talking about the creation of a global security alignment with the United States and its allies all over the world, its advanced industrial allies. And of course, the Chinese look at that, and they say “We feel like we are being contained by this thing, by the ‘advanced democracies’ and we don't like that at all.”

 

So you are seeing the emergence of competing architecture and yet at the same time that's happening, the Americans and the Chinese are doing an incredible amount of business with each other, incredible amount of finance with each other. And every American ally has no interest in a cold war with China. They don't want to be forced to choose between an alliance with the United States and doing more business with the Chinese.

 

So I think we don't want to go too far in suggesting deglobalization. Yes, the Russians are being deglobalized. They will no longer do business with the G-7. But the Chinese are doing business everywhere.

 

Overall, the trend in U.S.-China and West-China relations is going to be increased investment, not less as China becomes the most important market in the world and as American multinational corporations want to have access to the most important market in the world.

 

CHRIS HYZY:

Bringing this forward to say the next five years, maybe the next 10 years, Ian. What are the opportunities out there in a very volatile geopolitical landscape, particularly from the United States perspective?  What gives you that positive view over the next half to full decade, given everything we just discussed?

 

IAN BREMMER:

Well, the dollar of course, is trading at record levels. And the reason for that is the size of the American market, the transparency of the American market, the innovation of the American market, its geographical location. And so those things don't go away. Those are those are very significant advantages.

 

And on top of that, the willingness of the Americans to increasingly invest in new technologies, in the bio space, in the energy space, in the AI space, the only country in the world that is competitive with the U.S. in that scale and that capacity is China.

 

The funny thing is the Chinese are outcompeting the Americans massively when you look at investments in Africa or Southeast Asia or Brazil, and if you're thinking about if the Americans have influence on the ground in those countries, the answer is increasingly “No.”  Because the Chinese have Belt & Road and the Americans have nothing remotely like that.

 

And yet, when you talk about inbound investment into the United States or China, the Chinese are hobbled by at least as great a degree by their own inability to create the architecture, the institutional framework, the level of confidence you can have as an investor that you will get the return that your investment merits. And so as a consequence, as a market for inbound investment, the United States continues to be by far, by far the most attractive.

 

CHRIS HYZY:

Ian, always great to get your thoughts and insights. Thanks for spending time with me today.

 

IAN BREMMER:

Great to be with you, Chris.

 

CHRIS HYZY:

Let’s go now to my conversation with Savita Subramanian and Michael Gapen for their views on the U.S. economy and the markets and what they’re watching for in the second half of the year.    

 

So I'm going to start with you, Michael, first. Needless to say, it has been a challenging environment, in both the markets and the economy. And there's a lot of talk, how to take a picture of this cycle, in relationship to prior economic cycles. Take us through your thoughts on what's most relevant now to the prior cycles.

 

MICHAEL GAPEN:

I think certainly it's a very unusual cycle and I wouldn't really put it in the context of any prior cycle. Probably the closest analogy would be coming out of the post-World War II period, where we had to rebalance the entire economy from a military-industrial complex to one geared to producing goods and services and houses for returning GIs and so forth, so converting back to a peacetime economy.

 

We generated a lot of inflation coming out of World War II. So I think what we're dealing with, it's some reorientation, some restructuring of the economy, a reopening phase. We're having difficulty rebalancing supply and demand, coming out of the pandemic. It's likely to be with us for probably 18 to 24 months and then I think we will have settled in.

 

CHRIS HYZY: 

You mentioned inflation just a bit. Let's dive into inflation right now. So many different ways to calculate inflation.  How should we look at inflation from this point forward in terms of the trend?

 

MICHAEL GAPEN: 

Well, I think that we're probably at the peak of inflationary pressures. They're coming from strong aggregate demand. They’re coming from pandemic-influenced supply chain disruptions. They're coming from geopolitical tensions on energy prices.

 

There's some evidence that a few of these are finally turning. We've been waiting for core goods prices, things that we buy, to begin to reverse and decline. There's some evidence that that is indeed happening. So I think what we should expect is stickiness in some of this, particularly in services.

 

But the trajectory now seems a little more clear and the Fed has certainly shifted its tone. The Fed's willing to get into the game now, potentially slowing down aggregate demand. And therefore, we think inflation heads lower. The question is, how quickly over what time horizon? And I still think it'll take us two, two and half years, maybe three, to get inflation back down to levels that the Fed is comfortable with.

 

CHRIS HYZY: 

So Savita, it's been an uncomfortable capital market environment in both fixed income and equities across the board.  Probably on record, one of the worst combination years we've witnessed in many, many decades and perhaps ever.

 

Take us through your thoughts between now and the end of the year.

 

SAVITA SUBRAMANIAN: 

Yeah, Chris, it's been a painful year.  Our view from now until the end of the year is pretty similar as our view at the beginning of the year. Stick with total return. Stick with safe dividend yield. We're past the point where price returns are going to drive your portfolio. You want to think about income as a major contributor to your portfolio returns.

 

Look for companies that are growing their dividends, that have healthy balance sheets, good visibility in terms of earnings and can pay you a dividend while you wait for the economy to improve a bit.

 

Our favorites sectors are healthcare, consumer staples, which are generally more defensive areas of the economic spectrum.  But we also like energy. We think energy, oil prices, there’s going continue to be demand. There's going to continue to be inflation on the services side and that could continue to benefit the energy sector.

 

CHRIS HYZY: 

If you step back and take a look at the broad marketplace, are we still, even though we're in a cyclical bear market, are we still in a long-term secular bull market trend, in your opinion?

 

SAVITA SUBRAMANIAN:

Look, I think that stocks are going to continue to outperform bonds. I think that parts of the market look incredibly attractive from an equity perspective.

 

Do I think that there's more, you know, continued downside risk to the market from here through the end-of-year? Possibly, and that really depends on the trajectory of the economy.  It depends on the pace of the Fed. It depends on, you know, the pace of inflation resolving itself.

 

And I think that's the critical question is: Are we moving into a period of stagflation or a period where we start to see inflation moderate and the economy starts to slowly heal? And I think that would be the good-case scenario for equities.

 

CHRIS HYZY: 

That's a great segue back to you, Michael. In terms of the big question, the R-word, "recession." Just take us through your thoughts on the best estimates around potential recession on the horizon or not.

 

MICHAEL GAPEN: 

Yes, you're exactly right. We're likely to have two quarters of negative growth here in front of us. The first quarter, I think, was an anomaly and probably a response to the fourth quarter. I don't think the economy was really contracting in the first quarter.

 

I think recession risk right now is really dependent on your outlook for services spending. We all expect goods consumption to be soft. Households are rebalancing away from goods and towards services. So we're all looking for spending on goods to be soft.

 

I think the idea here is, does the Fed tighten to the point where spending on services is weak? Is inflation strong enough over time that it eats into household expenditures in a way that means, "We don't have a lot left after buying food and gas to spend on a discretionary basis." So I really think it's about services demand and services spending. 

 

If that spending holds up, hiring is likely to hold up and the economy likely continues in its growth phase. If spending on services slows, at some point, you would think demand for labor would slow and then maybe we have a mild downturn in front of us.

 

CHRIS HYZY: 

You mentioned jobs. It's fascinating to see what's going on in the vacancy rate. Even if we went into a recession, is this -- could we look back on this and call this a "job-full" type of slowdown?

 

MICHAEL GAPEN: 

It's very possible because there is a lot of demand for labor. And even on the goods side of the economy, we're probably still playing catch-up there for things like automotive production and vehicle assemblies. The data suggests that retailers have rebalanced well, but other parts of the economy have not.

 

So it may be that any kind of modest slowdown is taken as an opportunity by some sectors to kind of right-size. So it could very well be the case that any softening in the labor market is short-lived or any shedding of labor is relatively minor.

 

I would not be surprised, for example, to see a downturn coincide with growing vehicle assemblies, right. You'd never find that historically, but it's a different type of cycle. So I wouldn't be surprised to see something like that.

 

CHRIS HYZY: 

Speaking of different type of cycles, Savita, you mentioned energy before. We've been discussing real assets for a while, partly as a hedge on inflation, but also partly as an area that's been under-owned in terms of a portfolio for many, many, many years, if not decades.

 

What are your thoughts, just generally speaking, on the sector, particularly energy and commodities in general? Are we still early in this resumption cycle, if you will?

 

SAVITA SUBRAMANIAN: 

I think we are, I mean, especially on energy. We're not in a net-zero economy yet. We still need oil to get there.  And what I think has been interesting is that despite the fact that energy has doubled in its size in the S&P 500 over the last 12 months, investors are possibly even more underweight the sector today than they were a couple of years ago.

 

These are companies that are generating the highest free-cash-flow-to-price of all sectors in the S&P 500. They protect you against inflation on the commodities side, but they also offer safe and stable income.

 

From a broader market perspective, I think the idea of looking for free cash flow is also important in terms of thinking about companies that are going to benefit from a CapEx cycle. And this is something that we've heard about from a lot of companies. Despite the fact that they're seeing slowing demand trends, they're still intimating that they are going to continue to spend more than we expect on CapEx. Whether that's on automating more expensive labor, whether that's on nearshoring or reshoring.

 

So I think one of the themes you can think about, even in this volatile market, is what companies are going to benefit from a real CapEx cycle that we haven't seen in a very long time.  And here, we like select industrials. We like automation plays. We like energy.  And we also think that small caps can benefit from a real CapEx cycle.

CHRIS HYZY: 

There's a small, little event that is happening in November called the "midterm elections."  So Michael, let's start with you. Take us through your thoughts, potentially, on any outcome as it relates to the economy.

 

MICHAEL GAPEN: 

Certainly, midterms tend to go against the administration in office. So I think some re-shifting of the deck chairs is likely, at least if you look at it from a historical perspective, but that would still leave us with a divided government.

 

So right now we have, you know, close, narrow advantage for Democrats in the House and the Senate, but we've seen it's difficult for them to get their priorities through, particularly in the Senate. So I wouldn't look for any major effect on the economy coming out of the midterms or any major change in policy.

 

CHRIS HYZY: 

Savita, any major impact on the broader markets, in and of themselves?

 

SAVITA SUBRAMANIAN: 

Midterms have generally been good for markets. Small-caps have generally outperformed large-caps. I mean, obviously, there's so much today that's different from anything we've experienced. But I think that this is an environment where if we do get gridlock, what we found is that gridlock is actually the best recipe for equity market returns, and you know that's just something to keep in mind. We could be close to the end of this painful down market cycle.

 

CHRIS HYZY: 

So let's end on a bright note here. Looking out over the next half to full-decade, Michael, I'll start with you, in terms of the drivers of the U.S. economy and is the U.S. still in the cat bird seat, if you will?

 

MICHAEL GAPEN: 

For me, it is because I think we're still the most dynamic economy around. I think we have good entrepreneurial spirit. So I still think that there are lots of reasons to think about investing in the U.S. and I think returns to capital in the U.S. still outpace our competition. 

 

I think coming out of the pandemic, it's shown us that we are leaders in industries that are really important right now, whether that's tech or bio-tech or some of the industries that Savita has mentioned.

 

On top of that, I would say I do think macro trends will go in the direction of lower inflation. And so if that's the case, I think some of our fundamental underpinnings can benefit from disinflationary pressures and which would likely be beneficial for both economic growth as well as equity market performance over time.

 

CHRIS HYZY: 

Savita, speaking of bright spots, take us through a way that investors and our clients can think about turning volatility into long-term opportunities as it relates to the long-term positive you foresee as we head out over the next half-decade or so.

 

SAVITA SUBRAMANIAN: 

Yeah, absolutely. Lots of positives within the U.S. equity market. As Michael pointed out,

we are the most innovative country in the world. When you think about the latest advances in medical technology and internet, the U.S. is at the forefront and that's translated into strong market gains.

 

I think that we could also see something we haven't seen in a long time, which is productivity gains. And when you think about companies that are grappling with higher inflation, nearshoring, geopolitical risks, carbon emissions reduction, we could see a lot of this translate into productivity over a longer time period, which is a great boon for the stock market.

 

The final point I would make is one of the best arbitrage opportunities that we as investors have is time. And what we found is that a long time horizon for equities can actually smooth out a lot of the volatility that we've seen. So keep in mind that time is on your side when it comes to holding stocks.

 

CHRIS HYZY: 

And that's a great place to end. Savita, Michael, I want to thank you for your insights and your time today.

 

MICHAEL GAPEN: 

Thank you.

 

SAVITA SUBRAMANIAN:

Thanks.

 

CHRIS HYZY:

That makes the perfect segue for my discussion with Joe Curtin and with Marci McGregor.  Together, we’ll consider how investors could make sense of all the changes we’re seeing and offer steps you could take now to help turn volatility into opportunities. 

 

So Marcy, let's start with you. How do you think about the risk reward equation from an asset allocation perspective, given the markets we're in today?

 

MARCI MCGREGOR:

It's a great question, Chris. And I like to think about what has changed and what hasn't changed. We know volatility is a part of investing, as frustrating and as persistent as it's been this year and that's completely out of our control.

 

But we have to think about what's driving the volatility. That's the “what's changed.” It's inflation, the highest that we've seen in 40 years.  It’s liquidity being drained from the market by a Federal Reserve that's adjusting policy.  Rates are resetting higher. 

 

But a lot of things for us as investors haven't changed. You know, we still know that time in the market is the most important factor. If you look at the S&P 500, if you extend your time horizon out to call it 10 years, the probability of a negative return is just 6%. (Source: S&P, Bloomberg, BofA U.S. Equity & Quantitative Strategy, from 1929-Feb. 2022).  So time in the market matters.

 

What we also know and history tells us is that companies and corporations are resilient. They don't just change with the cyclical trends that are going on, like higher inflation and rising wages. But companies also adapt to secular trends, like innovation and maybe shifts in consumer preferences. And ultimately, that's what drives earnings. That's what drives markets higher.  

 

So I would say this isn't necessarily a time to be taking big tactical swings. But remember to go back to those core principles of diversification, being really balanced in your approach to investing and staying disciplined to those longer-term goals. I think none of that has changed for us as investors and now's the time I would be really well diversified.

 

CHRIS HYZY:

So Joe, Marcy talked about a lot of concepts there.  Can you just take us through the foundational core principles of asset allocation and the reasoning behind it?

 

JOE CURTIN:

Yeah, Chris, we always know that market cycles end when equity prices peak and a new market cycle begins when equity prices bottom, right.  But the problem is we never know when we're at the top or the bottom.  And the core principle is really having the right strategic asset allocation to meet your long-term goals.

 

CHRIS HYZY:

The anchor?

 

JOE CURTIN:

Absolutely the anchor.  That's the most important part, because that tells you what is the risk you need to actually meet those goals. 

 

The second is really understanding your downside risk.  Being north of that, you expose yourself to undue risk and being below that you don't have enough risk to meet your goals. So with the market gyrations, knowing your downside and ensuring you have the right asset allocation, and you're rebalancing periodically to get back to center.

 

CHRIS HYZY:

Now let's talk about rebalancing for a second.  You know, rebalancing could be up.  It could be rebalancing down. How do you take that into consideration?

 

JOE CURTIN:

Yeah, it comes down to, you know, if you've had a tremendous run up in equity prices, you find yourself overexposed to risk, right?  Coming out of last year if you had not made a rebalancing decision, that could have been a scenario you had. And also when equity markets underperform expectations you find yourself underexposed to risk.

 

CHRIS HYZY:

And Marcy talked about time in the market being very important. What we mean by that is, doesn't mean do nothing. It's rebalancing. It's looking at your strategic anchor and the targets around it. And if you get overexposed to any one area, you rebalance down, just like you said.

 

Let's talk a little bit about diversification now.  It's often discussed, sometimes very little practiced. Can you just give us a little bit about from your perspective what that means?

 

JOE CURTIN:

Yeah, diversification is really you're allocating your investments across various asset classes.

You have equities, you have fixed income, you have cash and then within each of those categories, you have subcategories: U.S. large-cap growth / value, small-cap growth / value, international, emerging markets and then some categories within fixed income.

 

So you get diversification across the broader asset classes, diversification within those asset classes. And then within those sub-asset classes, it's really about ensuring you don't have concentration risk, right. One stock does not represent an asset class. Three stocks don't represent an asset class.  So asset allocation ensures you're very well diversified. And as you look at your asset allocation mix, you're making that decision to rebalance to get back within your comfort zone from a risk perspective, to meet your goals.

 

CHRIS HYZY:

Diversification comes in many different ways. Sometimes it's adding new types of solutions or areas within each asset class as to how you want to allocate.  For qualified investors, alternative investments can add some diversification to a portfolio.

 

So Marcy, what is diversification for qualified investors mean as it relates to alternative investments?

 

MARCI MCGREGOR:

Well, it may mean adding things like hedge funds, private equity, managed futures or real assets, which I think of as commodities and private real estate, to further diversify a portfolio. I would be using all the tools in my investor toolkit right now.

 

Now you want to right size the allocation considering things like liquidity, because often certain alternative investments may have a different liquidity profile. And use it as a strategic longer-term allocation to further diversified portfolios.

 

But AI can add a lot of benefits like longer-term capital appreciation. You can also access traditional markets like stocks and bonds using different strategies and that adds diversification benefits and often adds non-correlated assets into the portfolio. And it can also provide differentiated income streams, like in the case of private real estate. 

 

There's a lot of benefits, but I would think about them in a strategic fashion for broad portfolio diversification.

 

CHRIS HYZY:

Let's go from this point forward all the way into the spring of next year. What rebalancing opportunities do you foresee for our clients to take advantage of in the context of asset allocation?

 

MARCI MCGREGOR:

I would take a holistic approach right now to your rebalancing strategy. I would think about both taxable and tax efficient accounts when you're thinking about rebalancing.  There may be ways to rebalance in a more tax efficient way, like tax loss harvesting, to take -- to position for some of these losses that we've seen in portfolios. So I would think about that big picture and think about all the different investments you have when you think about rebalancing.

 

Now that said, given the market that we're in, I do think we're going to have rebalancing opportunities, like you said, between now and the spring. Earnings expectations are likely to be reset. I think that could be one source of stability for markets.

 

And I would also keep an eye on the Federal Reserve. So much about this environment is this battle between the Fed and inflation. Once inflation gets down to a call it “an acceptable level,” you can have the Fed pause their interest rate hikes, and I think that could be another point where markets calm this volatility and maybe find a bit of stability here.

 

We're still believers we're in a long-term secular bull market. So I would keep an eye out for these shifts as opportunities to rebalance and to position and reset for where we are in the cycle.

 

CHRIS HYZY:

Joe, there are retirees out there, there are income-seeking investors out there. What are your final thoughts regarding yields, where we are right now?  And is there an opportunity in the fixed income markets heading into next year that we haven't seen for a few years?

 

JOE CURTIN:

Yeah, Chris, what I would say is, retirees should be thinking about the retirement paradigm a little bit differently, right.  So we like to think in terms of total return.  And at times, it may mean we get more of the return through appreciation and other times we'll get more of the return through income, right? This is one of those inflection points where we may see more of the total return coming from yield. That could be equities, that could also be fixed income. At this point in the cycle, getting some more yield from equities. That can be some value stocks, that could be from defensives, that could be from cyclicals.

 

And then within fixed income, we like the areas in credit where you're getting a positive spread. We like municipals because you're getting a great after-tax yield. And those are the two sectors that are less susceptible to rising interest rates. And as interest rates continue to increase, you could rebalance. 

 

But at the current time, you don't want to miss out on the yield within equities. And then eventually when the markets do recover, you get all that appreciation back up again. So I would say total return approach, stay diversified and own yield in both areas, equities as well as fixed income.

 

CHRIS HYZY:

Joe, that's a great place to end. Joe, Marcy, thank you very much for your insights today and thank you for taking the time with me.

 

And thank you all for tuning in to this midyear outlook edition of the Merrill Perspectives podcast.

 

Here are a few final thoughts to keep in mind for the rest of the year and beyond.

 

First, be sure you're well-diversified within and across asset classes.

 

Second, consider using any pullbacks in the equity markets to add to areas you may be under-exposed to.

 

Third, make a plan to review your asset allocation regularly and rebalance your portfolio as needed. Finally, have a consistent and disciplined investment process and maintain a clear focus on your long-term financial goals.

 

You can learn more about our latest insights on the markets at ml.com. And you can sign up for Merrill Perspectives wherever you get your podcasts.

 

Thanks again for listening.

 

 

Important Disclosures

 

Opinions are as of the date of this webcast – 07/11/2022 and are subject to change.

 

Ian Bremmer, Eurasia Group and GZERO Media are not affiliated with Bank of America Corporation.

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

 

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.

 

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

 

This material does not take into account a client’s particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your advisor.

 

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad.  Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.  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.  Bonds are subject to interest rate, inflation and credit risks.  Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights of municipal security holders. Income from investing in municipal bonds is generally exempt from federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax.  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 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. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.

 

Nonfinancial assets, such as closely-held businesses, real estate, fine art, 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. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

 

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

 

Alternative investments are speculative and involve a high degree of risk.

 

Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.

 

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

 

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 (“BofA Corp.”).

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker‐dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.

 

Merrill Private Wealth Management is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Private Wealth Advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill’s obligations will differ among these services. Investments involve risk, including the possible lo ss of principal investment.

 

The banking, credit and trust services sold by the Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC and other affiliated banks.

 

Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”). Trust and fiduciary services are provided by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A.

 

Banking products are provided by Bank of America, N.A. and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation.

 

Investment products:

 

Are Not FDIC Insured

Are Not Bank Guaranteed

May Lose Value

 

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