Opportunity in today's volatility

Periodic swings in the market are unlikely to upend this economy, says our Chief Investment Office. Consider them potential opportunities to strategically add to your portfolio.


October 14, 2021

THOUGH MARKETS HAVE CLIMBED STEADILY IN 2021, investors may be wondering whether risks ranging from the Delta coronavirus variant to rising inflation could spell the end of the bull market. Yet while risks abound and periods of volatility are likely in the months to come, “long-term economic fundamentals appear strong enough to weather temporary setbacks,” says Joe Curtin, head of Portfolio Management, Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “In fact, occasional bouts of weakness may provide investors with potential opportunities to rebalance or strategically add to their portfolios.”

A recent CIO Viewpoint paper, “The Rotation Is Underway,” looks at the current market environment and highlights factors that could drive periodic volatility, including higher inflation for longer and potential timing of the Federal Reserve’s (the Fed’s) pull back on bond buying. Still, says Curtin, “markets are likely to grind higher for the balance of 2021 and beyond.” Below he points to five factors that could drive continued growth and suggests strategies that investors might consider.

Joe Curtin headshot
“Occasional bouts of weakness should provide investors with potential opportunities to rebalance or strategically add to their portfolios.”

— Joe Curtin, head of Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank

1. Economic strength. “Solid household balance sheets, strong pent-up demand, robust household and business formation, rising capital goods orders and inventory rebuilding should all add to above-consensus growth,” Curtin says.

2. Corporate profits, revenues and operating leverage are currently performing beyond expectations. “We believe these trends will continue in the fourth quarter of 2021,” he adds.

3. Investors have cash on hand. Though investor sentiment has turned to “slightly concerned,” Curtin notes, many investors have cash that could still be invested.

4. “The cost of capital for corporations is close to record lows and should support rising capital investment,” Curtin says.

5. Greater policy transparency. The Fed has been steadily purchasing bonds to stimulate economic growth during the pandemic. As the economy continues to grow, the Fed is signaling tapering back those purchases. Clear signals as to the timeline for tapering should give markets time to prepare, he notes.

What all of this could mean for your portfolio

While investment decisions should always be made in the context of your personal goals, time horizon, liquidity needs and long-term strategy, the coming months may offer investors opportunities to rebalance or add to their portfolios across asset classes, Curtin notes.

Stocks. The economy is likely to continue to grind higher for the balance of 2021 and beyond, believes Curtin. That’s why the CIO continues to favor equities over fixed income. “Stocks of large U.S. companies may be particularly attractive, thanks to their combination of high quality, dividends and potential growth,” Curtin says. “Periods of volatility may be a good time to consider adding sectors such as financials, industrials, energy and materials, which could likely benefit from the continued economic recovery,” he adds. “Meanwhile, technology companies remain attractive amid a rise in spending on innovation, productivity and digitalization of the economy.”

“Periods of volatility may be a good time to consider adding sectors such as financials, industrials, energy and materials, which could likely benefit from the continued economic recovery.”

— Joe Curtin, head of Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank

Current conditions favor investing in a mix of growth and value stocks that would simultaneously gain from cyclical and secular forces gaining traction, Curtin says. Growth stocks — companies with the potential to grow and outperform overall markets — should likely benefit from accelerated secular investments in 5G, artificial intelligence, cloud computing, robotics, demographics and health infrastructure globally. Value stocks — companies that have higher exposure to cyclical sectors — are likely to benefit from improved earnings growth and economic normalization. “We also favor the U.S. equity markets over the rest of the world,” he notes.

Bonds. Fixed income investors may want to consider bonds with shorter rather than longer duration to offset the potential effects of inflation, which has been consistently running above the Fed’s 2% target. “Though the market believes any further increases in inflation will be transitory, we do need to be prepared for an elevated level of inflation driven by easy monetary policy, supply chain issues and supply-demand imbalances for goods as well as services,” says Curtin.

Because their rates have been declining recently, Treasurys may be attractive to investors mainly as a way to balance stock risks in their portfolios, he adds. Investors seeking higher yields may want to consider high-quality corporate bonds. “Investment-grade corporates should continue to outperform Treasurys as the global economic recovery continues to play out.  However, taxable investors may want to consider municipal bonds,” he suggests. Shortening duration could help to mitigate some impact from rising interest rates.

Alternative investments. Qualified other investors may want to capture long-term opportunities through alternative investments such as hedge funds, private equity and other strategies, which could help them capitalize on potential opportunities not available through traditional stocks and bonds, Curtin says. Yet alternative investments should be considered only by qualified investors with complex and specific investing needs, he adds.

Regardless of which investments may be appropriate for you, ask your advisor what you can do to prepare for markets poised to grind higher during the rest of 2021 and beyond, he suggests. 

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Important Disclosures

Opinions are as of 10/14/2021 and are subject to change.

Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

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

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 (“BofA Corp.”).  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.

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.  Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the manager's assessment of a company's prospects is wrong, the price of its stock may not approach the value the manager has placed on it. Investing in growth stocks incurs the possibility of losses because their prices are sensitive to changes in current or expected earnings. Bonds are subject to interest rate, inflation and credit risks.  Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT), and state and local taxes may also apply. 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.

High yield bonds that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default.

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.

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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