The Horizon — Q3 Update

Elements of the Mid-cycle Transition

Woman looking at the horizon

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. 

“… recently the markets have displayed some confusing price action, leading investors to question the length and pace of the cycle."

— Kirsten Cabacungan,
Assistant Vice President and Investment Strategist

The powerful economic recovery from the depths of March 2020 has surprised investors. Just five quarters into this new business cycle, the dramatic gross domestic product (GDP) loss of roughly 10% has been recouped and equity prices have far surpassed pre-pandemic highs by about 30%. To contrast, during the 2008 Great Financial Crisis (GFC), the recovery in stocks took four years to get back to previous levels and six years to surpass the previous levels by 30%. The level of consumer spending is already higher by roughly 7% from pre-pandemic levels and inflation, often the scourge which brings an end to a business cycle is already running at the highest level in roughly 13 years.

“… if equities continue to drift higher and bond yields rise towards previous highs for the year, it could potentially present ​a rebalance opportunity from equities into bonds, from a risk management perspective."

— Emily Avioli,
Assistant Vice President and Investment Strategist​

As the economy progressed towards recovery, areas which typically tend to lead off bear market lows like small caps and Value have done well. But recently the markets have displayed some confusing price action, leading investors to question the length and pace of the cycle. For example—market leadership has been unclear with secular growth oriented sectors reasserting their dominance; market breadth has deteriorated as mega cap technology names have regained their footing; bond yields have declined and remain at confusingly low levels despite positive economic data; and yield curves have flattened despite inflation prints coming in higher than expected.

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

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Investing involves risk. There is always the potential of losing money when you invest in securities. Past performance does not guarantee future results. Asset allocation, rebalancing and diversification do not guarantee against risk in broadly declining markets.

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