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HISTORIC VOLATILITY BROUGHT AN 11-YEAR BULL MARKET to an end in March,1 but 2020 could mark the beginning of a new one. That’s not as counterintuitive as it may sound, says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. “New bull markets are born from the depths of despair, when it seems that all hope is lost.”
While millions remain unemployed and the coronavirus has yet to be eradicated, the economy offers reasons for encouragement. “May retail sales, released this week, were up 17.7% from April, much higher than the expected 8.8%,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Homebuilder sentiment posted its biggest monthly gain ever and manufacturing numbers are consistently moving up.”
Risks abound, interest rates and growth remain very low, and many investors are understandably bearish. Yet markets are responding favorably to the positive news. And the Federal Reserve has made clear its intention to continue providing liquidity while inflation remains at low to moderate levels—two keys to a sustained recovery, Mukherjee says. Here are four reasons he believes a long-term bull market may be on the way.
1. Oil bounces back. Since the epic collapse in April (when prices briefly went negative), oil prices have nearly doubled as motorists returned to the roads.
2. The dollar weakens. “The U.S. dollar has reversed its scorching rally from March,” Mukherjee says. “This is less about a loss of faith in the U.S. fiscal position and more a signal of stabilization and confidence in global growth.”
3. Stocks rally across sectors. Healthcare, technology and communications stocks have naturally led the way during the pandemic. But since mid-May, cyclical stocks such as industrials, financials and energy have improved as well, along with higher-risk small-cap and value stocks. “That’s a healthy sign in terms of overall market participation,” Mukherjee notes.
4. Corporate credit improves. “Companies have been able to issue record amounts of debt to shore up their balance sheets,” Mukherjee says. Access to credit has in turn reduced fears of widespread bankruptcies, he adds.
What could this mean for investors?
Another indicator of long-term market potential: bearish investors hold large sums of cash awaiting reinvestment. “More than $4.5 trillion of cash is parked in money funds that have not participated in the current rally,” Mukherjee says. The road ahead could be a bumpy period of “creative destruction,” he adds. “Declining business models will either shrink in market value, go out of business or be taken over to be fixed by stronger players. Ultimately, this should raise productivity for the broader economy.” Meanwhile, innovations in 5G and other technologies should prompt new waves of technology investment.
Yet despite the long-term potential a secular bull market may offer, individual investors should approach it with care. “We expect periodic volatility throughout the summer, given the number of risks that are out there,” Hyzy says. Threats include a major second wave of the virus, which could stall the reopening process and threaten economic recovery.
Maintain a diversified portfolio geared to your long-term goals, rebalance in response to volatility, and speak with your advisor about strategic ways to prepare for a possible bull market ahead, Hyzy advises. Adds Mukherjee: “Investors will have to be disciplined, nimble and focused on managing risks in order to capture these opportunities.”
1 “Coronavirus Sell-Off Sends Plunging Dow Into Bear Territory After 11-Year Bull Market,” US News, March 11, 2020.
Information is as of 06/26/2020
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