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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.

Read the full report