Stop waiting for the recession — get ready for the next bull market

Moves to consider now as you navigate today’s uncertainty and position your investments for potential future growth


AS THE ECONOMY DELIVERS ONE SURPRISE AFTER ANOTHER, the all-but-certain recession of 2023 has morphed into the possible recession of 2024. If it finally does arrive, as fewer and fewer observers still believe it will, it may not feel like a traditional recession at all, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

With rolling downturns hitting segments of the economy at different times, he notes, “investors may be too focused on waiting to see when a recession is officially declared before adjusting their portfolios.” A better question may be, “How can I respond now to position my investments for an extended bull market likely to begin after the turbulence subsides.”

Understanding today’s crosscurrents

Chalk up today’s uncertainties in large part to the lingering effects of the pandemic, when stimulus programs injected trillions of dollars into the economy. As the pandemic waned, the Federal Reserve (the Fed) in March 2022 began an aggressive campaign to raise interest rates to tamp down spiking inflation and slow the economy. The yield curve dutifully inverted, with short-term bond yields running higher than long-term yields, and sectors such as technology and housing, which boomed during the pandemic, experienced downturns.

Chris Hyzy headshot
“Relatively speaking, a new more sustainable bull market, driven by a new profit cycle, is right around the corner.”
— Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank

Yet if all that added up to an imminent recession, somebody forgot to tell consumers. Bolstered in part by savings accrued during the pandemic, they have continued to spend, especially on a booming services economy. Companies have hired more workers than expected, corporate earnings have proved resilient even amid rising wages, and stock markets surged in the first half of 2023.

Eventually, higher interest rates will take their toll on the labor market and consumer spending, Hyzy believes. “We have already experienced softening in durable goods,” he says. A downturn in travel and other services by late 2023 could further slow growth by early to mid 2024. “Even then, the slowdown may feel more like a pause in growth than a hard landing,” Hyzy says. “In fact, we’re calling it a growth recession.”

To help navigate these crosscurrents, Hyzy points to steps investors could consider in both the short and longer term. For more timely insights, read “Midyear 2023: What’s driving today’s resilient economy?” and watch “Midyear 2023: How to prepare for what’s ahead.”

Next moves: Navigating the present

Choppy, disruptive conditions are likely to persist for the next year to 18 months, Hyzy believes. “For now, we have a neutral outlook on equities, but that doesn’t mean do nothing,” he says.

The market’s strong performance in the first half of 2023 may have caused imbalances in your portfolio. “If investments in one area have appreciated above the benchmarks laid out in your long-term strategy, it could make sense to sell some of those assets and deploy the funds elsewhere.” Dollar cost averaging, which involves investing at regular, steady intervals, could help you rebalance more efficiently and buy more shares when prices are lower.

For bond investors, higher rates have translated into meaningful income for the first time in years. The next shift in the economy to watch for is a gradual flattening of the yield curve, as long-term rates edge incrementally higher relative to short-term rates. This should unfold over the next 18 months to two years, Hyzy believes. With the specific timing impossible to predict, you may want to consider bond ladders — a series of short-term bonds with steadily progressing maturity dates — to capture their current higher income potential. In the months to come, you might consider shifting to longer-term bonds, in expectation of the yield curve returning to normal.

Next moves: Preparing for the future

Even as you position your portfolio for near-term uncertainties, it’s not too early to consider strategies for the economy’s likely more momentous next move: an era of potentially steady growth. “Relatively speaking, a new more sustainable bull market, driven by a new profit cycle, is right around the corner,” Hyzy says. “Over the next year and a half, investors who have kept excess cash on the sidelines may want to consider strategic ways to put that capital to work for the future.” He highlights these areas to watch:

“Over the next year and a half, investors who have kept excess cash on the sidelines may want to consider strategic ways to put that capital to work for the future.”
— Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank

New technologies. Lower volatility and normalized inflation and interest rates should usher in a period of remarkable innovation, with long-term opportunities in areas ranging from renewable energies and healthcare to industrial automation and robotics, Hyzy believes. “Artificial intelligence (AI), while still in its infancy from an investment perspective, will reshape the economy,” he says. In particular, generative AI (GAI), capable of creating new content, will drive productivity and cost savings across industries.

Industrials. New technologies will require massive infrastructure to support alternative energies, electric vehicles, healthcare technology, artificial intelligence and more, Hyzy says. Industrial companies will play a major part in that transformation.

Emerging markets. “As major producers of natural resources, especially metals, emerging markets could be in the catbird seat over the next two to five years, as the United States and other countries ramp up their infrastructure,” Hyzy says. “Investors may also want to look at developed economies, particularly Japan, where we’re seeing a big move in shareholder value for the first time in decades.”

Small-cap stocks. While smaller companies struggle during downturns, they’re poised to benefit from the extended bull market, Hyzy says. “They provide larger companies with goods and services to improve margins and increase automation and productivity,” he says. Small caps will also benefit from post-pandemic re-shoring, as supply chains move closer to home.

Above all, stay focused on your goals

As recent developments demonstrate, nobody knows precisely when a recession will come. Planning your next moves, both short and long term, should not be confused with high-risk attempts to time the markets by predicting daily gyrations, Hyzy cautions. “The best approach starts with a careful consideration of why you’re investing and what you hope to achieve,” he says. “Then, you can factor in near- and long-term shifts as part of a diversified portfolio aimed at achieving your personal goals.”

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Important Disclosures

Opinions are as of 07/11/23 and are subject to change.

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

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.”).

Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss. 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.

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.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investments in emerging- and frontier-markets securities may be subject to greater market, credit, currency, liquidity, legal, political and other risks compared with assets invested in developed foreign countries.

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