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THOUGH THE PANDEMIC CAME ON with breathtaking speed, recovery will be slower—as evidenced by today’s Labor Department announcement that the unemployment rate hit 14.7%, with 20.5 million Americans losing their jobs in April.1 “The sharp weakness in the job market comes on the back of a record increase in jobless claims since the crisis began,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Yet recent signs of financial market stability suggest that investors see grim employment numbers as a painful but expected “pass-through” phase on the way to a recovery that could start in late 2020.
Recovery will likely bring fundamental shifts in the global economy and behavioral changes among consumers and corporations, says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. “Investment portfolios will have to adapt.” A new Capital Market Outlook report from the Chief Investment Office (CIO) offers three strategies for long-term investors to consider. “Your advisor can help you evaluate whether any—or all three—might make sense for you,” adds Hyzy.
#1: Big companies and growth industries
Rationale: Research suggests that, going back to the 14th century, pandemics typically have been followed by extended periods of low interest rates, Mukherjee notes.2 Low rates generally create favorable conditions for stocks—especially of large companies and those in industries poised for growth, he adds. As millions of Americans buy, work, learn and visit their doctors remotely, opportunities may include healthcare technology, e-commerce and internet technology, among others.
#2: High-quality dividends and corporate bonds
Rationale: “Following periods of deep economic stress, personal savings have historically increased as households have rebuilt wealth,” Mukherjee says. With low rates limiting income from U.S. Treasuries, investors may find stronger income potential (albeit with added risk) from investment grade corporate bonds of modest duration, or from dividend-paying stocks.3 “Nearly 400 companies on the S&P 500 are offering dividends higher than the yields for 10-year Treasuries,” he adds. A risk to consider: as of May 4, 85 companies on the S&P 1,500 had cut dividends—with more dividend cuts likely to follow. To help mitigate that risk, you could avoid hard-hit industries such as travel and seek large companies with strong balance sheets, he suggests.
#3: U.S. stocks over international
Rationale: Compared with their counterparts in international developed and emerging markets, “large U.S. companies have historically tended to have stronger fundamentals, including higher return on equity, profit margins and earnings growth,” Mukherjee says. While U.S. stocks are relatively more expensive, they can likely make up that difference as the pandemic eases. “We believe a large domestic consumer base, natural resources, education, healthcare, skilled labor and innovation help create advantages for U.S. companies,” he says.
1“U.S. Jobs Report Shows Clearest Data Yet on Economic Toll: Live Updates,” The New York Times, May 8, 2020.
2“Longer-Run Economic Consequences of Pandemics,” Federal Reserve Bank of San Francisco as of March 2020.
3Corporations may determine to not pay dividends based on market circumstances.
Information is as of 05/08/2020
Opinions are those of the author(s) and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of Bank of America Corporation (“BofA Corp.”).
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
Dividend payments are not guaranteed, and are paid only when declared by an issuer's board of directors. The amount of a dividend payment, if any, can vary over time.
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