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The Horizon
The Market Balance Sheet—Plenty of Shareholder Equity Remains
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.
“While forecasting economic variables will always be an imprecise exercise, a clear-eyed understanding of the bull and the bear cases can aid key portfolio decisions.”
—Nick Giorgi,
Director and Investment Strategist
The marketplace is providing conflicting signals on the future path of financial assets. On one hand, risk assets like equities and commodities have already risen handily. On the other hand, massive fiscal and monetary policy stimulus already in place, with potentially more to come, we believe this could further push up prices to new deserved highs—or into extended territory.
A relevant question often asked by investors at market highs is how much good news may already be priced in. Outside of extremes, this question is difficult to answer by simply looking at recent returns and valuation multiples. This is because every economic cycle is unique, and the response of policy makers and the ability and health of companies emerging from a crisis can vary.
“We view the Market Balance Sheet as tilting towards a supportive backdrop favoring Global Equities versus Fixed Income, based upon improving economic activity and corporate earnings, low but rising inflation and interest rates, and an accommodative policy backdrop.”
—Kirsten Cabacungan,
Assistant Vice President and Investment Strategist
In this report, we introduce a Market Balance Sheet showing factors that favor further upside (Assets) versus factors that call for getting cautious (Liabilities) and then those that are on balance or in transition (See Exhibit 1 in the linked report). Broadly speaking, these factors are bucketed into macro inputs, policy, and markets. In our view, managing long-term portfolios is as much about understanding the upside as it is about acknowledging the downside, all the while remaining true to the overall financial plan. And while forecasting economic variables will always be an imprecise exercise, a clear-eyed understanding of the bull and the bear cases can aid key portfolio decisions such as how much risk to carry and where to allocate it at a given point in the cycle, within the context of baseline return expectations and time horizons.
Important Disclosures
All data, projections and opinions are as of the date of this report and subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
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.
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.
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.
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 a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
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