The Horizon

Taking Action in a Changing Economic Landscape


The Horizon is a quarterly report from our Chief Investment Office, exclusive to Merrill Private Wealth Management, intended to help high net-worth clients pursue their personal goals by addressing timely topics in areas such as macroeconomic trends, long-term investment themes, market dynamics, asset allocation and portfolio strategy as well as wealth structuring, planning and transfer.

The first quarter of the year has been characterized by a U.S. economy that shows signs of reaccelerating, a strong labor market, a robust consumer, better-than-expected earnings reports, the potential for the Federal Reserve (Fed) to begin cutting interest rates, and the continuation of the 2023 Equity market rally.

In light of these changing dynamics within the economy, in this edition of The Horizon we emphasize ways investors can take action within their portfolios to capitalize on potential future returns. We highlight our more positive view on Small-caps and the Consumer Discretionary and Industrials sectors, discuss how to utilize capital during Equity market highs and remind our readers of the core principles for long-term investing.

“With indicators showing economic green shoots, improving earnings trends and potential easing in monetary policy, the more cyclical areas of the market, such as Small-caps and the Consumer Discretionary and Industrials sectors, may be future leaders in the coming years and are important for investors to have exposure to within their portfolios.”
— Marci McGregor, Managing Director, Head of CIO Portfolio Strategy

Let’s Get Cyclical

We increased our exposure to more cyclical areas of the markets like Small-caps and certain sectors, such as Consumer Discretionary and Industrials, as we believe peak interest rates and peak inflation are behind us and see other positive factors, such as a resilient U.S. economy and consumer. In our recent Equity Spotlight report, “Let’s Get Cyclical,”1 we explore the reasoning behind these upgrades based on the shifting macro regime.

To start, Small-caps have attractive valuations along with improving fundamentals. They look reasonably cheap both on a relative and absolute basis. The Russell 2000 Index, a benchmark for Small-cap performance, is trading at about an 8% discount to its long-run 10-year average compared to the roughly 17% premium currently exhibited by the S&P 500, a benchmark for Large-cap performance.

If economic indicators remain resilient, more cyclical sectors, like Consumer Discretionary and Industrials, are likely to perform better than more defensive areas. For example, the U.S. consumer has remained relatively resilient and surprised to the upside this cycle. While pandemic-era stimulus may have dried up and consumer savings have declined, other sources of funds have been utilized, whether it be traditional credit or new payment forms, which are popular with younger people. This helps improve overall discretionary purchasing power. If we continue to see additional positive dynamics, such as a still-solid job market and wages, lower energy costs and declining interest rates, this would be encouraging for consumer confidence.

Looking at the Industrial sector, the aerospace and defense areas are expected to benefit from tailwinds as nations increase defense spending amidst heightened and unpredictable geopolitical backdrops. Although Industrials have underperformed the broader S&P 500 in the post-pandemic period, they look poised to improve with easing financial conditions and normalizing supply chains. Ultimately, with indicators showing economic green shoots, improving earnings trends and potential easing in monetary policy, the more cyclical areas of the market, such as Small-caps and the Consumer Discretionary and Industrials sectors, may be future leaders in the coming years and are important for investors to have exposure to within their portfolios.

Investing at All-Time Highs

The S&P 500 has powered on full steam ahead into the first quarter of the year, reaching multiple record-breaking closing highs and even surpassing 5,200 for the first time in history. While this is likely welcome news for fully invested individuals, those with excess cash on the sidelines may be left wondering if they have missed the boat. Not to worry! In “Considerations for Investing at All-Time Highs”2 from our weekly Capital Market Outlook report, we highlight multiple factors that should be considered when deploying cash into the market when equities are at record levels.

Many investors may have flocked into cash as it can be perceived as a ‘risk-free’ investment. However, while it depends on the individual’s time horizon and financial goals, there are significant costs to sitting on the sidelines for too long. To illustrate, if an investor started out with a $100,000 Equity portfolio at the beginning of 2007 and sold at the market bottom to invest in cash, they would have had $57,000 at the end of 2023. If they simply stayed invested, their initial portfolio of $100,000 would have grown to $472,000 over the same period.3

Additionally, while some investors may be hesitant to re-engage in the market due to concerns that buying Equities at high starting levels could limit future upside, history shows us that higher index levels are not necessarily associated with lackluster forward returns.  In fact, all-time highs have usually been grouped together during past secular bull market cycles, with the period from 1980 to 2000 delivering 18 years with new records.

Overall, we believe investors should remain fully invested and diversified within their portfolios while maintaining Cash, Equity, and Fixed Income allocations that are in line with their long-term investment horizon and personal financial goals.

“Volatility can be an integral part of investing as periods of weakness may provide attractive buying opportunities for investors to add to their portfolios.”
— Theadora Lamprecht, Assistant Vice President, Investment Strategist

A Guide for Long-term Investors

While many factors such as Fed interest rate decisions, market volatility and geopolitical events are beyond our control, investors ought to maintain the core principles of long-term investing. The biggest lesson for building a strong financial future is to stick to a plan with a disciplined investment process and to stay invested. In our Investment Insights piece, “Steer the Course of Your Financial Future: A Guide for Long-term Investors,”4 we discuss several fundamental aspects to help drive the course of your financial journey.

First, know your long-term financial goals and yourself as an investor. Determining your goals, whether they’re related to retirement, education or liquidity, helps to provide purpose behind investing. One of the most effective ways to implement this is by establishing the foundation of your portfolio with a long-term strategic asset allocation that incorporates a mix of assets like stocks, bonds, cash and Alternative Investments for qualified investors.

Also, remember that volatility is normal, so stay the course. In extraordinary and unpredictable times, market volatility can rise to extremes and create concern for investors. However, volatility can be an integral part of investing as periods of weakness may provide attractive buying opportunities for investors to add to their portfolios. From January 1980 until the end of December 2023, the S&P 500 saw an average intra-year decline of 14% in a calendar year and still managed to see positive annual returns 75% of the time, with an average return of 10%. Furthermore, while the ‘optimal’ time to get into the market does not exist, time is on your side so let it work for you by remaining fully invested. Missing just the 10 best days of returns in the 2010s would have meant realizing diminished returns of only 95% versus 190% for the full decade.5 Lengthening time horizons can also help to smooth out volatility in equity returns, with the probability of negative equity returns historically falling.

Lastly, it is important to focus on diversification as this may help minimize risk and balance out a portfolio. Holding a blend of assets may reduce the overall effect of a dramatic decline in the value of one in the mix.

We continue to advocate for an appropriately balanced, diversified portfolio, with exposure to both Equities and Fixed Income (and Alternative Investments where appropriate). We recommend investors remain fully invested, which we believe will be beneficial for longer-term financial success.

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1 Chief Investment Office, “Let’s Get Cyclical,” February 2024.

2 Chief Investment Office, “Considerations for Investing at All-Time Highs,” Capital Market Outlook, February 12, 2024.

Source: Bloomberg. Data as of December 29, 2023. The market is represented by the S&P 500 Index. Cash is represented by the ICE BofA U.S. 3-month Treasury Bill Index. The data assumes reinvestment of income and does not account for taxes or transaction costs.

Chief Investment Office, “Steer the Course of Your Financial Future: A Guide for Long-term Investors,” March 2024.

Sources: BofA Global Research. S&P 500. Data as of February 6, 2024.

Important Disclosures

All data, projections and opinions are as of the date of this report and subject to change.

Past performance does not guarantee future results. It is not possible to invest in an index.

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 Merrill financial advisor.

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.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

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.”).

All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.

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

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.

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. Bonds are subject to interest rate, inflation and credit risks. 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 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. 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.

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