Market briefs

Breaking insights on the economy, market volatility, policy changes and geopolitical events.
December 20, 2024

Fed rate-cut forecast takes markets by surprise

In a widely expected move, the Federal Reserve (the Fed) announced their third and last rate cut of the year earlier this week — another quarter-point drop. While the announcement was expected, remarks made by Fed chair Jerome Powell indicating a slower pace of cuts, from an expected four to two in 2025, poured cold water on the equity markets. By market close Wednesday, the three major stock indices were down 2.5 to 3 percent or more for the day, while Treasury yields climbed.Footnote 1
A short-term reset, such as we’ve just seen, only creates a stronger base from which to begin 2025. — Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank
"Based on the latest data on inflation, the economy and the job market, the BofA Global Research team was already forecasting only two cuts for 2025," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "Clearly, many market participants expected more."
Why did the markets react the way they did?
Investors have been looking forward to the potential for continued strong economic growth, healthy corporate profits and premium stock valuations in 2025, says Hyzy. The Fed’s data-driven forecast, based on uncertainty around the future path of inflation and the labor market, pushed the yields on Treasurys higher and affected equities, particularly in sectors most sensitive to high interest rates, negatively. High-growth equities and shares in sectors sensitive to high rates led the market declines, notes Hyzy.
What's next — and what can investors do?
"Equities have already begun to bounce back, but there's little doubt that investors will continue to remain on edge, especially with a lack of clarity around a possible government shutdown causing more volatility," notes Hyzy. But, amid the uncertainty, some things haven't changed. "As always, it's important to stay diversified and focused on your goals," he adds.
"We still have high conviction in our themes of higher economic growth and profits for 2025, driven by increased productivity, a more normal yield curve, wider participation across the equity markets, a positive view on small- and mid-cap shares, and an emerging asset-light era that will benefit companies more resistant to interest-rate fluctuations." In fact, he adds, "A short-term reset, such as we've just seen, only creates a stronger base from which to begin 2025."
For more insights on how you can prepare for risks and opportunities in the year ahead, watch our Outlook 2025 program "Get ready for what's next." To learn more about this week's Fed decision and resulting market volatility, read the latest Investment Insights report, "Fed flashes yellow."
Footnote 1 Reuters, "Stocks dive after Fed cuts rates, signals slower easing pace in 2025," December 19, 2024.
December 13, 2024

Get ready for the asset-light economy

In the information age, corporate dominance no longer necessarily means having the biggest factories and longest production lines. The financial edge increasingly goes to companies with fewer fixed assets and greater flexibility, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. "As we look ahead to the new year, the asset-light economy is one of our key growth themes for 2025 and beyond."
An economy increasingly dominated by asset-light companies could help drive long-term growth and an extended bull market for investors. Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank
The asset-light advantage
"Compared with manufacturing and other asset-heavy industries, asset-light companies — many of them in the tech and healthcare sectors — generally are more focused on intellectual property than real-world assets, and they have more capital to spend on high-growth areas of their businesses," Hyzy says. With less need for credit to finance fixed assets, they're more resistant to interest rate fluctuations and they are often less labor-intensive. "An economy increasingly dominated by asset-light companies could help drive long-term growth and an extended bull market for investors," Hyzy believes.
"The asset-light economy should gain momentum in 2025 and 2026, thanks to some economic bright spots we see developing," he says. "The rapid advance of artificial intelligence and other technologies is already bringing greater productivity and operating leverage to companies across industries. And markets generally are rebalancing away from dominance by a small handful of companies, leaving more room for younger asset-light companies to grow."
But, even as their share of the economy diminishes, asset-heavy industries will remain essential, notes Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. In fact, thanks to technology's enormous need for energy and other resources, asset-heavy companies could even experience a boost as they help to meet the need for more infrastructure to power the asset-light economy.
How investors can prepare
"Big picture, asset light's increasing dominance, with its potential to drive higher productivity and profits, is good for the economy and markets," sums up Hyzy. But, notes McGregor, "Valuation of these companies can be a challenge, and that's something investors need to think about in the lens of this new asset-light world." As always, it's important to maintain a diversified portfolio.
For a deeper look at the asset-light economy and what it could mean for your investments in the year ahead, read the CIO's December Viewpoint, "2025 Year Ahead: The Advancement of the Asset-Light Era (PDF)." And be sure to tune in to the Outlook 2025 program "Get ready for what's next" for a full view of what to expect across sectors, industries and asset classes in the new year and beyond.
November 21, 2024

New political leadership and your portfolio

A new administration is poised to take over the government in January, with one party controlling both the White House and Congress (with slim margins) and many major policy shifts, from taxes to tariffs and more, under consideration. So, naturally, investors have questions: Will there be new market winners and losers? Could the post-election rally last? And how might our resilient economy be affected?
[Intro Music]
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Markets, Policy and New Political Leadership:
Charting the Path Forward
Chris Hyzy
Welcome to our post-election conversation: Markets, Policy and New Political Leadership: Charting the Path Forward. I'm Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. The United States just emerged from an historic election cycle, one which saw the re-election of Donald Trump to the White House and Republicans winning majorities in both houses of Congress. As with any change in political leadership, we can expect to see a number of shifts in policy priorities.
On-screen copy:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Chris Hyzy
What might all of this mean for the markets now and in the coming year? And are there steps you could take now to prepare? Joining me to discuss all of this and more are Savita Subramanian, head of U.S. Equity and quantitative strategy, B of A Global Research, and Jim Carlisle, Public Policy Executive for Bank of America.
Welcome to you both.
Savita Subramanian
Great to be here.
Chris Hyzy
I'm going to start with you, Jim. We're sitting here today. Election's over with. We didn't know we were going to have this certainty, or at least most of it. Take us through between now all the way into inauguration. What are the major developments that you see?
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Jim Carlisle
Public Policy Executive
Bank of America
Jim Carlisle
Sure. Thanks. First, the current Congress, they're not done yet. And there are two things that they have to get done. One, they've got to fund the government. There's a stopgap funding bill that expires on the 20th, and they've got to deal with how to fund government programs for the remainder of the fiscal year that ends September 30.. Under one school of thought, they do another stopgap into early 2025, and then Republicans with unified control can figure out sort of how they want.
Chris Hyzy
From that point.
Jim Carlisle
To finish it up for that point forward. Alternatively, there's maybe a growing school of thought that says maybe the new Republican Congress and a new president in the White House, they don't want to be dealing with this old business. So maybe they go ahead and try to, like, clear the decks, pass a funding bill, taking, uh, spending through the end of the fiscal year.
Jim Carlisle
And then second, there is an annual defense authorization bill, and that usually is done late in the year, and it's must-pass. And so it often becomes a Christmas tree for unrelated provisions. What we're seeing right now is because Republicans feel like they can write their own version of legislation next year. Things like, you know, how you regulate digital assets.
Jim Carlisle
They're legislative proposals that have been, you know, developed on a bipartisan basis. But Republicans are beginning to think maybe we'd rather do that, uh, and not have to compromise in a new, in a new year with the new administration. Maybe a crypto-friendlier administration. And then energy permitting reform, where we saw a lot of bipartisan, uh, development over the last month or two.
Jim Carlisle
Um, they, uh, there was, I think, a lot of, um, optimism that you might see a deal get done by the end of the year. We're thinking that becomes a 2025 issue as well. And then Congress comes back, uh, January 3rd. Uh, they will need to, the House will need to elect a speaker. Um, we're not anticipating right now the drama that we've seen, uh, in, you know, over the past year or so. but they'll do that. And then, uh, we're also going to see over the coming days, coming weeks, uh, you know, the additional drips of who, president elect Trump wants in his cabinet and even beginning to fill in down below cabinet level positions.
Chris Hyzy
And that also includes the change that we've already heard to the speakership as well.
Jim Carlisle
That's right.
Chris Hyzy
So still a lot of, uh, certainty as we sit here, but still as we are used to, a lot of uncertainty. Speaking of uncertainty, Savita, uh, the markets surprise us all the time.
Savita Subramanian
Indeed.
Chris Hyzy
But you've talked about the profit cycle for a while. You were early in the stage of what we're seeing unfold right now. Take us through now into next year of what you believe are the main components that can continue to drive and not necessarily continue to take the market to new highs, but just confirm what we're, what we're seeing unfold right now.
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Savita Subramanian
Head of U.S. Equity Strategy & Quantitative Strategy
BofA Global Research
Savita Subramanian
Yeah. No, I think it's a great way to frame the question is less about I'm not talking about the index level, but it's more about the underlying corporate earnings, uh, that we're seeing strong support for. And we saw the seeds sown for this, you know, a couple of years ago. And to your point on productivity, I think one of the big surprises to me and to a lot of investors is that we got through a period of rampant inflation volatility.
At some point, CPI was 9%. Uh, we saw a lot of shifting trends in rates and inflation. Yet corporate America managed to maintain fairly stable margins. And I think this speaks to the fact that companies have been using efficiency tools as a way to navigate a very, um, volatile rates and inflation backdrop. On top of that, we've seen reshoring initiatives that started, probably at the beginning of the 2010s, um, and have only accelerated since the 2018 tariff wars.
So we're now at a point where half of the economic activity that U.S. companies used to do with China, uh, has shifted to other areas of the world, uh, Vietnam, Mexico, Canada. But the idea of 60% tariffs, which we'll talk about, uh, is probably less dramatically negative than the headline number would suggest for China tariffs.
Chris Hyzy
As you said, we're going to talk a little bit about tariffs. We're going to talk about potential impact to earnings or other measures. I want to stick on this point about profits. And we're now seeing that broaden out to others.
Savita Subramanian
Yes.
Chris Hyzy
Not just the mega-cap tech.
Savita Subramanian
Beyond the mega-cap tech
Chris Hyzy
That's right.
Savita Subramanian
Yes, it's very exciting for us to behold. But the S&P 493, ex-Magnificent Seven, is back in the black. They are posting earnings, positive earnings growth. Last year. This was a cohort of the market, a big cohort of the market that was in a profits recession. So, we are seeing that broadening trend, real time.
Chris Hyzy
Yeah. And you know, we always look for signs or confirmation as to why certain parts of the market have outperformed. And it made sense when that narrow part, given the fact that the rest were not performing and now the rest are performing, fundamentally speaking. And here we are and we're watching the financial sector outperform. We're watching small caps begin to outperform and most people are talking about it being for what new policies are becoming.
But you talked about this rotation and this rebalancing. Do you see that continuing?
Savita Subramanian
I do. I mean, I think it depends on a lot of factors, like for example, interest rates, I think, are the potential governor on growth. So, if we see a big rate shock, which I think is, you know, the the fear that many investors have under a more inflationary backdrop that could quell this, uh, positive trajectory for some areas of the market.
Um, but so far, what we've got are three pretty pro-cyclical events taking place right now. One, the Fed has embarked on a cutting cycle. Two, profits are accelerating as we speak. And three, we have a red sweep, which is arguably more pro-cyclical. And, um, you know, I think is is a backdrop which is relatively friendly to large businesses from both a regulatory and a tax perspective.
Chris Hyzy
Yeah, that's a great point. So let's go back to you, Jim. Let's talk a little bit about post-inauguration, first hundred days. What are the major focal points?
Jim Carlisle
So, I think two for the new administration. One, is working with Congress on, tax legislation. So the 2017 tax cuts expire at the end of the year, the end of 2025. These are tax cuts for individuals. Uh, absent action, top rate goes back to 39.6%. All the rate brackets reset. Lots of other, um, tax provisions go away or get or benefits get reduced.
Neither party wants to see that happen across the board. But Republicans are planning to write a budget reconciliation bill early in 2025. The magic of a reconciliation bill is that can't be filibustered in the Senate. So you can pass it with a bare majority. Um, but there are restrictions around what you can do in a reconciliation bill. If you extend all of the 2017 act tax cuts, you're looking at a price tag of around 4 trillion dollars for individuals and their sticker shock around that number.
Jim Carlisle
We still do have some deficit hawks, and there is a continuing and maybe growing question. You know, what is the debt load that the markets can handle? And no one knows the answer to that question. So, there is sort of a presumption that, okay, red sweep all the tax cuts get get extended permanently. Um, I think it's going to be a different story.
Uh, number one, they're going to have to figure out how much deficit, um, addition to the deficit they can handle, they can stomach. And that's the first thing you have to do right out of the, right out of the gate. Because to get to a reconciliation bill, you have to pass a budget resolution that specifies the impact of that bill on the deficit.
So they got to pick a number. And that could be an ugly, um, exercise. And it's not going to be easy because the margins are very thin. And you've got to bring along nearly every House Republican. We're not anticipating Democratic votes for a Republican drafted bill right now. And the Senate margins are tight, tight as well. So there's discussion about getting this done in the first 100 days. But they got to make a lot of very difficult policy decisions and political decisions to get to a final bill.
Chris Hyzy
And market impact to that. We'll have to wait and see. The 4 trillion is a big number. That doesn't also include the fact that there could be a lowering of the corporate tax rate as well on top of that.
Jim Carlisle
Right.
Chris Hyzy
And then there's talk of tariffs paying for some of that. But there's estimates that tariff impact or at least revenues coming into the U.S. government would be in the hundreds of billions versus the trillions.
So, Savita, unpack that really complex equation that Jim just unfolded there.
Savita Subramanian
Yes. It is complex
Chris Hyzy
Just thinking about it today. How does the market take this in stride?
Savita Subramanian
Well, look, I think there is the other component of debt to GDP, which is GDP. And I think there is, you know, some potential that we see what's happened in prior cycles of higher debt burden for the government, which is GDP growth accelerates faster than debt growth. And in fact, that's precisely what we've seen in the last two problematic periods where debt to GDP got to dangerous levels.
So I think we need to kind of factor in, there is an offset to the just the debt burden, which is the fact that the U.S. is on a path towards growing at a more healthy clip than what we saw during the 2010s when we were in this period of, of zero interest rate policy of struggling, uh, global, uh, growth on an economic backdrop.
So I think, you know, we're at a point where we could see the GD -- the U.S. -- grow its way out of this. That's one offset. Um, other offsets are the idea that, you know, if we do see an unloosing of, oil supply that could serve as a benefit to consumers. So if you think about the percentage of wallet that lower income consumers are spending on oil and gas today, any alleviation in the price of oil transports, heating, driving, etc. would be a boon to consumption, which is, again, another driver of GDP and another way to offset, uh, debt burdens.
It is complicated, though, and I think that, you know, we've seen the market run up on the positives under this administration. And I think there are a lot of positives, but the devil is always in the details. Um, again, I would point out, though, that corporate America is quite adept at navigating policy changes. In fact, you know, I'm a quant, so we run all of these quantitative analyzes. And what we found is that tax rates, you know, tariffs, policy changes matter for certain areas of the market. But they don't necessarily matter as much as one might expect. Um, so I think that's one way to think about the next 12 months. We might see more volatility around headline risk around, you know, what is posited early on.
Maybe the bad news comes first. Maybe we hear more tariff talk which investors see as growth negative, rather than tax cut talk which investors see as growth positive.
Jim Carlisle
Another thing they'll be working on besides tax policy and trying to figure out where they want to go on tariffs, um, and that's going to be maybe personnel-dependent. And you know, who ends up where, but regulatory policy. Um, President Trump has talked about cutting six regs for every one new reg. Um, he had a version of that in his first term, and we generally saw, um, a lightening of the regulatory burden.
We're going to continue to see that they, there are regulations that were finalized in the last six months of this year, um, that can be overturned under the Congressional Review Act, by legislation, by Congress with a simple majority. Um, we may see that. We may see regulations that were in proposed form, um, that had kind of stalled that we don't expect to see maybe finalized.
So, um, there's just lots of areas that have been impacted by regulations where we can see the pendulum maybe starting to come back the other way.
Chris Hyzy
Savita, talk us about two or three main opportunities for 2025, that you could see still unfolding that may be or already be starting.
Savita Subramanian
Yeah, absolutely. I mean, I think that, you know, beyond mega-cap tech and within that cohort there are still certainly opportunities for investing. Um, but beyond this sort of tech-heavy market, we see a lot of opportunities within larger cap financials where, you know, we're finally at a point in the yield curve that has historically been bullish for financials.
Um, where we've seen large cap, regulated banks really avoid a lot of the the loan extensions that typically accompany a credit cycle. So they're, they're ending this credit cycle with really pristine balance sheets. And we're at a point where I think policymakers, regardless of their, um, their party, want to see growth continue in the U.S. They want to see manufacturing continue in the US, jobs creation, tech IP moved out of other parts of the world back to the U.S., and this requires lending. Who's left to lend? Well, there is this cohort that hasn't really participated in loan growth for the last 10 to 15 years that now could actually start to see loan growth. So I think this is a really, a pretty positive set up for large cap financials.
On top of that, you've got potential productivity changes. Um, when you think about generative AI, I think that the applications within financial services are really exciting. And you know, we're already trialing some of those, those applications. So, there is the opportunity for a sector that has really not taken advantage of a lot of the efficiency and productivity gains, um, ripe for really trimming some of that cost structure, some of that labor intensity.
And also seeing some loan growth. I think there that is an exciting part of the market. Um, granted, it's already run up a bit, but, uh, but I think there could be more to go as this story unfolds.
Chris Hyzy
Speaking of more to go, potentially lower regulation, steeper yield curve. There's been very little M&A over the past few years. Do you see an M&A cycle benefiting small and mid-caps?
Savita Subramanian
We do. And again, I think it's important to be selective. Um, but we do see the opportunity for some of the pent-up demand for M&A, to actually materialize. Um, again, I don't know if this is as dramatic as some are forecasting, because again, when you think about M&A cycles, another big component for a company to buy another company is the cost of capital and the hurdle rate. And when I look at the risks to all of these growth positive themes, I do think that the cost of capital is a big concern.
So, we really need to be vigilant on rates on, you know, kind of what's the r-return on capital of a project? And I think that's going to be more important for whether an M&A cycle really materializes, rather than just, regulations loosening.
Um, also this year we've actually seen pretty healthy M&A activity. So it's not like we're, we're seeing a lot of, you know, kind of pent up deal flow that's going to immediately materialize. I think we're actually seeing some reasonable momentum even this year, pre-election.
Chris Hyzy
And that's great. Jim, final, final question: What are some of the areas that you think will be very difficult to get through.
Jim Carlisle
Difficult to get through? Um, one, Republicans have talked about repealing the Inflation Reduction Act and you know, when you, uh, sort of drill down a little bit, um, you know, a lot of that investment is taking place in red states. Um, a lot of it is, you know, locked in already. Um, so I think we might see, you know, surgical, um, sort of work around the IRA electric vehicle credits might be number one on the list.
And then there's some programmatic, um, work around, uh, the IRA that the agencies were implementing that might come to a little bit of a, of a halt. So I think that's difficult to get done. Um, I do think there is, uh, an appetite for immigration reform. Um, and we saw development of a bipartisan Senate bill, uh, earlier in the year. Um, you can kind of point to areas where you think, um, a compromise and much needed reforms can get done. But when you start getting into it and, um, you've got an administration that may be in a different place, I mean, it gets difficult very quickly, but I think both parties would agree we really need it. Um, can you get there? That's hard.
Chris Hyzy
One thing we haven't talked about, and perhaps for another time, is there are still checks and balances, right? Checks and balances in the market, checks and balances in the government. And that's what ultimately creates this world where the greatest, adjusted risk return is what you'll ultimately end up seeing as money continues to move around the globe.
Chris Hyzy
Thank you, Savita. Thank you, Jim for the valuable insights and helping us get from where we are today to the other side.
And thanks to all of you for taking the time to watch. We hope you find these insights useful. As you weigh the potential impact of the changes we've discussed today on your portfolios, be sure to keep your long-term goals in mind.
Stay diversified and if you work with an advisor, ask for their help in navigating what's next, both the risks and the opportunities. And check back frequently for more insights leading up to our Get Ready for What's Next Outlook 2025 webcast, launching on December 12th.
Be sure to tune in.
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[-] Close transcript
The markets tend to care more about profits than politics, notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That said, he adds, "there's no question that some of the policy changes being considered have the potential to benefit certain sectors and asset classes more than others."Still, he continues, "it's important to remember that there are checks and balances in both the markets and government as money moves around the globe. Change is a constant, but we continue to believe that the market drivers are already in place for another extension of the bull market cycle over the next five to 10 years."
The video above features Hyzy's wide-ranging post-election conversation with Savita Subramanian, head of U.S. Equity & Quantitative Strategy for BofA Global Research, and Jim Carlisle, Public Policy Executive for Bank of America.
Watch it for insights on ways you can prepare for the potential changes ahead. And be sure to tune in to the Outlook 2025 webcast "Get ready for what's next" on December 12 for more tips to help you navigate the markets in the new year. As always, check back regularly for our latest insights and perspectives and tune in weekly to the CIO's Market Update audiocast series
October 25, 2024

What should investors expect from the coming election?

In an election offering two starkly different visions for the United States, it's easy to assume that the future direction of the economy is dependent on November's results. But while the importance of our choices for the presidency and Congress shouldn't be minimized, investors may find reassurance in the underlying strength of the U.S. economy, according to Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Hyzy recently spoke with Libby Cantrill, head of public policy for the global bond firm PIMCO, to exchange perspectives on the ways the vote could affect markets and the U.S. economy — as well as the ways it's unlikely to have an impact.
In past presidential races, however contentious and regardless of outcome, markets have historically gone up after the votes are counted.
How is the election shaping up?
With a tight presidential race and both parties defending narrow and vulnerable majorities in the Senate (Democrats) and the House (Republicans), all scenarios are in play, Cantrill says — either a sweep by either party or a divided Congress. Both parties could lose control of their respective Houses, which would be a first in U.S. history. She adds that we may very well not know who the next president is on the night of the election. If that happens, the challenge for voters may be to recognize the need for careful counting and to trust the system as the process plays out.
What are the implications for industries, inflation and budget deficits?
Despite sharp and well-publicized differences, the parties share some basic economic positions, such as the need to support U.S. semiconductors, artificial intelligence and other technologies. "I don't see that radically changing, whether it's a Republican or Democratic administration," Cantrill says. In the energy sector, a Republican win could favor traditional fossil fuels through eased drilling restrictions, while Democrats would likely extend the push for renewable energies. Still, she observes, there are many people from both parties who realize that both sources of energy are needed.
Both Republicans and Democrats offer policies that could come with unintended consequences. Proposed higher tariffs under a Republican administration could spur price increases even as the Federal Reserve seeks to keep inflation coming down, Cantrill says. At the same time, the higher corporate taxes being discussed by some Democrats could pose a challenge to economic growth.
Neither party seems inclined to seriously address a budget deficit that now represents more than 6% of U.S. GDPFootnote 1, Cantrill says, adding that with one side pledging tax cuts and the other increased spending, the deficit could rise to 7-8% of GDP over the next decade. The dollar's status as the world's global reserve currency — and, in particular, the structural demand for U.S. Treasurys as the world's reserve asset — offers the U.S. unique protection, Cantrill believes. But she notes that high deficits, if unchecked, could eventually become a drag on the economy.
How can voters navigate the uncertainty?
While elections are vital in determining the political and economic direction of the country, history suggests investors should keep the potential impact on their portfolios in perspective. In past presidential races, however contentious and regardless of outcome, Cantrill notes, markets have historically gone up after the votes are counted.
According to Chris Hyzy, this pattern will likely hold true following the current election, thanks to the dynamic nature of the U.S. economy. "This 'innovation machine' continues to plow through most every challenge, and long-term opportunities for investors run wide and deep," Hyzy says. "What's most important is creating and sticking to a disciplined investment strategy designed to achieve your long-term goals."
For the latest market news and insights, tune in regularly to the CIO's Market Update audiocast series.
Footnote 1 As of 2023. Go to third-party website Congressional Budget Office popup.
September 19, 2024

What the first rate cut in years means for investors

After four years of rate hikes, the Federal Reserve (the Fed) cut the federal funds rate by 50 basis points amid ongoing signs of cooling inflation and a slowing economy.Footnote 1 While aimed at supporting a softening labor market, "this widely anticipated cut aligns with market expectations after historic increases in recent years to counter inflation," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Stocks that tend to benefit from rate cuts: Housing, Automotive, Financials, Dividend-paying stocks and Small caps. Past performance does not guarantee future results.
More to come. "This is the start of a rate cut cycle. Look for two additional cuts in 2024, followed by several more in 2025," says Matthew Diczok, head of Fixed Income Strategy for the Chief Investment Office (CIO). "While these should help bring inflation to the Fed's 2% target by early 2026, we don't believe the Fed is worried about hitting 2% exactly, as long as they see a continuing disinflationary trend. The Fed is more concerned with not slowing the economy too much."
The outlook for stocks. "When rates begin to fall, that has generally been positive for equities over the following 12 months," Hyzy notes. Industries such as housing, automotive and financials should benefit as consumers find borrowing less expensive, Diczok adds. And lower credit costs could also keep spending strong across the consumer sector.
"Investors may also find potential opportunities in dividend-paying stocks, which have historically done well as rates decline," Hyzy suggests. While history doesn't ensure future results, top dividend-payers in four previous cutting cycles beat the S&P 500 index by 7.3% one year after the first cut, and 12% after three years.Footnote 2 Another potential opportunity: Small cap stocks. "Lower rates improve access to capital, and small companies have recently regained earning momentum after several disappointing years," he says.
Seeking income? Consider shifting excess cash to bonds to lock in longer-term yields before short rates decline further. Matthew Diczok, head of Fixed Income Strategy, Chief Investment Office, Merrill and Bank of America Private Bank.
Implications for cash and bonds. "Income-seeking investors who have received attractive yields on excess cash in recent years may want to consider shifting to longer-term bonds before short rates go lower," Diczok suggests. "Bonds have been a good diversifier from stocks and, unlike cash, can offer a fixed, reliable income."
Look for buying opportunities. Amid these short-term considerations, don't overlook the long-term implications as rates (and the economy) normalize. "We see these cuts as helping set the stage for a long-term cycle of growth across industries," Hyzy says. "Accordingly, investors should view periodic market weakness as an opportunity to strategically add to their long-term portfolios."
For more timely insights on interest rates and the markets, read "And so it begins (PDF)," from the CIO and tune in to the CIO's Market Update audiocast series for regular updates.
Footnote 1 The New York Times, "Live update: Fed announces big rate cut," September 18, 2024.

Footnote 2 Bloomberg, Chief Investment Office as of May 7, 2024. Refers to cutting cycles of 2019, 2007, 2001, and 1995.
August 5, 2024

What's causing the volatility — and how can you respond?

A lower-than expected July jobs report drove markets down on Friday, during a week already beset by volatility.Footnote 1 The 800-point plunge in the Dow Jones Industrial Average raised new concerns about the prospects for an economy that has remained surprisingly resilient throughout 2024. Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, offers four reasons for the latest disruption and four reasons to keep things in perspective.
'Avoid sudden reactions to headlines and market shifts. Stay diversified across and within asset classes and rebalance as necessary.' - Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

4 drivers of volatility

  1. Recession concerns. "As reflected in the jobs report, economic data has been consistently slowing," Hyzy notes. "Investors fear early signs of a recession."
  2. Overdue rate cuts? Observers increasingly believe the Federal Reserve (the Fed) fell behind by not cutting rates at their July meeting.
  3. Geopolitics. With November's presidential election and wars abroad, "the geopolitical environment has become more uncertain," Hyzy says.
  4. Bond-buying pullback. A rate increase by the Bank of Japan and subsequent pull-back on bond buying has upset currency, interest rates and risk assets such as technology stocks globally.

4 reasons for calm

  1. Recession unlikely. "We believe the economy is still normalizing from pandemic-era disruptions," Hyzy says. "While the road back is rocky, the BofA Global Research team does not expect a recession, all things considered."
  2. Strong earnings. "Corporate profits remain healthy. We expect low double-digit growth for the S&P 500 this year, and mid to high single digits in 2025," Hyzy believes.
  3. Rational rate decisions. While rate moves naturally draw extra attention amid volatility, the Fed is working to normalize rates based on inflation and employment trends, rather than panic over a recession, Hyzy says. And potentially significant cuts appear likely soon. "The Fed funds futures market now has a better than 80% probability of a 50-basis-point cut in September."
  4. AI-powered productivity. "The long-run benefits of generative artificial intelligence (Gen AI) across a number of sectors are just beginning," Hyzy says. "Higher productivity combined with rapid innovation allows for more substantive corporate growth than many observers are seeing."

Expect more volatility, and stay diversified

As the economy continues to work through these challenges, investors should expect above average volatility in the short term, Hyzy says. "Avoid sudden reactions to headlines and market shifts," he suggests. "Stay diversified across and within asset classes and rebalance as necessary." As you consider your long-term investment goals, he adds, "look for periods of market weakness as an opportunity to strategically add to your portfolio."
For more on current market volatility, read "Four by Four Relay (PDF)," the latest Investment Insights from the CIO, and tune in to the CIO's Market Update audiocast series.
Footnote 1 MarketWatch, "Stock market today: Dow down 800 points as recession fears bulldoze stocks," August 2, 2024.
July 26, 2024

Can markets top their strong first half of 2024?

Defying predictions of a market letdown, the S&P 500 Index of the largest U.S. stocks surged 14.5% during the first half of 2024. So, can equities maintain that momentum through the rest of the year? History says it often happens.
What history tells us: In years when the S and P 500 returned greater than 10% in the first half, the index was higher 82.6% of the time in the second half. Source: Bloomberg. Data as of June 28, 2024. Past performance is no guarantee if future results. It is not possible to invest directly in an index.
"Since 1950, in years when the S&P 500 returned greater than 10% in the first half, the index was higher 82.6% of the time in the second half,"Footnote 1 says Kirsten Cabacungan, Investment Strategist for the Chief Investment Office (CIO) at Merrill and Bank of America Private Bank. While past performance doesn't guarantee future results, a recent Chief Investment Office Capital Market Outlook report, "Can U.S. equities take the heat (PDF)?" highlights three factors supporting that hopeful outlook:
  • Economic activity, while moderating, continues to outperform expectations, thanks to cooling inflation, a still-solid labor market and consumer spending.
  • The rise of generative artificial intelligence (AI) is driving enthusiasm for U.S. companies.
  • Corporate earnings are gaining momentum. "Analysts expect S&P 500 earnings to grow by around 11.0% this year and 14.4% in 2025, a big improvement over 2023," Cabacungan says.Footnote 2

What could hold the markets back?

Uncertainties, ranging from global geopolitics to the possibility that inflation could remain above the Federal Reserve's 2% target longer than expected, remain potential roadblocks. And then there's November's contentious presidential election. "The Chicago Board Options Exchange Volatility Index (VIX) has historically risen 25% on average from July to November during election years since 1928," Cabacungan says.Footnote 3 While stocks tend to rally after an election, lingering volatility could dampen second half results, she adds.

Market choppiness could create potential buying opportunities

Despite the markets' strong first-half performance, the economy is still working through extraordinary disruptions from the pandemic. "Until that's complete, investors should anticipate some market choppiness," Cabacungan notes. She suggests staying diversified both across and within asset classes and looking for opportunities to strategically add to your portfolio during times of weakness.
Footnote 1 Bloomberg. Data from January 1950 to December 2023.

Footnote 2 FactSet. Data as of June 26, 2024.

Footnote 3 BofA Global Research. March 2024. Based on data for all U.S. elections since 1928.

Next steps

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