Midyear 2021: Inflation, innovation and the path forward

Midyear 2021: Inflation, innovation and

the path forward

Hosted by:

Chris Hyzy

Chief Investment Officer,

Merrill and Bank of America Private Bank

Featuring:

Michelle Meyer

Head of U.S. Economics,

BofA Global Research

Haim Israel

Head of Global Thematic Investing Research,

BofA Global Research

Savita Subramanian

Head of U.S. Equity & Quantitative Strategy

& Head of ESG Research,

BofA Global Research

Rick Rieder

Chief Investment Officer of Global Fixed Income

and Head of the Global Allocation Team,

BlackRock

Please see important information at the end of this program.  Recorded on 07/07/2021.

[PROGRAM OPEN WITH TEXT OVER MONTAGE OF VIDEO CLIPS]

 

Economic outlook

Rising prices

Consumer spending

Business reopenings

Market risks

New investment trends

Midyear 2021: Inflation, innovation and the path forward

Please see important information at the end of this program.  Recorded on 07/07/2021.

Chris Hyzy:

Hello and welcome to this midyear 2021 virtual event.

[LOWER 3rd]

Chris Hyzy

Chief Investment Officer

Merrill and Bank of America Private Bank

I'm Chris Hyzy, and I'm pleased to be hosting this conversation we're calling “Inflation, innovation and the path forward.”

We'll be covering a lot of ground in the next half hour or so. So here's a quick look at the rundown.

In the first part of our program, I'll be speaking with three top experts from the BofA Global Research team on the economy, the markets and various investment themes.

[GRAPHIC]

Photo of Michelle Meyer

Head of U.S. Economics

BofA Global Research

First, Michelle Meyer, head of U.S. Economics will share her thinking on where the economic recovery could go from here. We'll about the consumer spending, inflation and interest rate trends and what's next for the red hot housing market.

[GRAPHIC]

Photo of Haim Israel

Head of Global Thematic Investing Research,

BofA Global Research

Photo of Savita Subramanian

Head of U.S. Equity & Quantitative Strategy

& Head of ESG Research

BofA Global Research

I'll be joined next by Haim Israel, head of Global Thematic Investing Research and Savita Subramanian, head of U.S. Equity & Quantitative Strategy and head of ESG Research.

We'll look at what's driving the equity market, the potential risks and the larger themes that could drive the next wave of innovation and global growth.

[GRAPHIC]

Photo of Rick Rieder

Chief Investment Officer of Global Fixed Income

and Head of the Global Allocation Team,

BlackRock

For the second part, I'll speak with our special guest, Rick Rieder, Chief Investment Officer of Global Fixed Income for BlackRock.  We'll take a trip around the world and across asset classes to discuss the opportunities and risks in today's markets and the key points to keep in mind around any potential tax changes. 

With that, I'd like to welcome Michelle Meyer to the program.

Michelle, thanks so much for joining me.

Michelle Meyer:

Great to be with you, Chris.

Chris Hyzy:

So, let's dive in with a big picture look at the U.S. economy. There's lots of pent up demand and overall good news is out there. Businesses have been reopening, consumers are spending and unlocking excess savings. Many of us are traveling again.  But there are still a number of risks to keep in mind as well.

 

Where do you think the economy stands today and where are we headed from here?

 

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Michelle Meyer

Head of U.S. Economics

BofA Global Research

 

Michelle Meyer:

So, just as you described Chris, there's a lot of good news out there. The reopening has been successful. People are able to re-engage.

 

[GRAPHIC]

Consumers are spending again

·         Leisure activities

·         Restaurants

·         Travel

·         Lodging

 

Going back out and spending on leisure activities, restaurants, travel, lodging and really, you know, utilizing all of the funds that have been accumulated over the last year.  Households have been able to also deleverage and build up wealth, so it's a really supportive environment for overall consumer spending.

 

And that is actually quite important when you think about the trajectory of the economy, because the ability to spend, we think, will help to continue to support economic growth as we look ahead.  So we would argue that we're at a point where the economy is still humming along at a very strong pace.   

 

There are constraints on the supply side. So there's some capacity constraints and you can see that in terms of very low inventory levels.  You can see that in terms of higher prices in certain categories.  But ultimately we think we're going to be able to find a better balance in the economy where supply starts to catch up to this extraordinary demand.

 

Chris Hyzy:

Let's talk about inflation now, something that's on a lot of people's minds. The Federal Reserve is now signaling it could raise interest rates in 2023 to keep prices and the economy from overheating. 

 

Could inflation present a real headwind to growth in the longer term? Or is this something as the Fed says is more temporary?

 

Michelle Meyer:

Sure. So, when you think about inflation, you have to first consider the source of inflation today. And it goes back to the comments before, around this kind of mismatch between demand and supply.

 

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A “mismatch” between demand and supply has created

temporary price pressures for certain goods.

 

And that's creating these price pressures that are showing up in a really significant way in certain parts of the economy, particularly the goods sector. So consider going out and trying to buy a car today or a washing machine or any of these types of big ticket items. There's low inventory and there's high prices.

 

However, this mismatch between demand and supply, we do think will prove to be transitory. And as a result, the price pressures that we're seeing won't last either.

 

And for the Fed, they're willing to tolerate short-term swings in prices.  But when you start to see a sustained increase in inflation and one that could ultimately be a challenge for the economy, that's when it matters for monetary policy.

 

Thus far, most of the evidence suggests the inflation spike we're seeing is temporary. We can get to the point where you have a higher underlying trend of inflation and that will generate the Fed to turn more hawkish and increase interest rates, which we think will be in 2023, but not before then.

 

Chris Hyzy:

Are we looking at a situation where the Federal Reserve and other officials are looking towards full employment before they would begin to bump up interest rates, even if money growth and inflation was well above their average inflation target of 2%?

 

Michelle Meyer:

Yeah. So we have to remember the Federal Reserve has a dual mandate: price stability and full employment. And ultimately those two should converge.  And I would argue that right now, the Fed has really focused on this idea of getting to full employment or maximum employment, and we're simply not there yet. So one critical part of the Fed's mandate has certainly not been achieved yet.

 

And then when you think about this mandate for price stability, yes, the current inflation numbers are really elevated.  But the Fed doesn't want to respond to what will end up being short-term swings in inflation. They want to respond to what they think will be the longer-term trend.  And that's why I think the Fed is really focused on getting to a point where they are confident that they will have an average of 2% inflation in the context of maximum employment.

 

Chris Hyzy:

One of the areas that has the greatest leverage or networking effect on the broader economy, both short term and long term is housing. The rise of remote work has enabled many people to move away from more expensive areas, which has been great for affordability. But home prices in other parts of the country have been skyrocketing.

 

Michelle, what's your take on where the housing market is right now?

 

Michelle Meyer:

The housing market is a classic example of where there's this mismatch between demand and supply.

 

[LOWER 3rd]

The U.S. housing market has been a classic example

of a mismatch in demand and supply.

 

You know, when the pandemic first hit, the expectation was that housing was going to suffer; that people would be quarantining and staying in their homes. And as a result, home builders cut production and we saw this big drop in housing starts and building permits.

 

But the exact opposite happened very quickly after the pandemic.  People went out and started to look for new homes and we saw this sharp increase in home sales and it took some time for builders to be able to respond.

 

So when we look ahead, we do think that we're going to be seeing some cooling and it's already showing up in the data.

 

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Recent data, such as mortgage purchase applications, 

indicate housing demand is cooling.

 

When we look at mortgage purchase applications, which is the best kind of real-time proxy of housing demand, mortgage purchase applications have been slipping since the highs in January.

 

That said, one of the dynamics that have changed just in the past month or so has been this very low level of interest rates.  And that can provide a bit more of a lift to housing, all else equal, because clearly new buyers are very sensitive to levels of interest rates when they think about the equation of whether or not to buy or to rent.

 

Chris Hyzy:

Michelle, thanks again for joining me. It's always great to speak with you and hear your insights.

 

Michelle Meyer:

Absolutely. Thanks for having me, Chris.

 

Chris Hyzy:

Next, I'd like to welcome Haim Israel and Savita Subramanian.

 

Haim, it's good to have you.

 

Haim Israel: 

A pleasure to be here, Chris, thank you.

 

Chris Hyzy:

And Savita, great to see you today as well.

 

Savita Subramanian:

Great to be here, Chris.  

 

[LOWER 3rd]

Chris Hyzy

Chief Investment Officer

Merrill and Bank of America Private Bank

 

 

Chris Hyzy:

Savita, we just heard Michelle's outlook for the U.S. economy.  I'd love to get your thoughts on where the markets stand at the midway point of this year.  And in particular, what's behind the strong run-up we've seen in U.S. equity prices. And where could things head in the second half, given the expectations for strong economic growth?

 

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Savita Subramanian

Head of U.S. Equity & Quantitative Strategy & Head of ESG Research

BofA Global Research

 

Savita Subramanian:

Yeah, absolutely. Chris, it's been a tremendous first half for equities and in particular for the S&P 500, you know, relative to other asset classes like bonds, gold.  And I think, you know, this makes sense within the context of 20% earnings growth this year. So I think that explains the strong run that we've seen in the first half. 

 

Now in the second half, I think things could get a little bit trickier. And what we're looking for is a more nuanced cyclical rally.

 

[GRAPHIC]

Cyclical areas of the market include:

·         Retail

·         Financials

·         Energy

·         Industrials

 

These are areas like retail or financials, energy, industrials, where you tend to see unit demand increase as the economy recovers.  I think what's interesting is that some cyclical areas of the market are still incredibly attractive from a valuation perspective.

 

So I would look for quality and discounted valuations and where we're seeing a lot of opportunities are financials, select industrials, energy and some consumer areas of the market as well.

 

Chris Hyzy:

And Savita, you were the one of the first to talk about this concept of operating leverage. Can you tell us your thoughts on operating leverage for 2021?

 

[LOWER 3^rd]

Operating leverage measures the degree a company

can increase operating income by increasing revenue.

 

Savita Subramanian:

What's typical in the early stages of an economic recovery is that you have, you know, margins compress, but you still see that stronger earnings growth driven by sales. And that's exactly what we're seeing right now.  Sales and earnings have both picked up demonstrably.

 

[LOWER 3rd]

Earnings for companies in the S&P 500 are projected to

grow by 30% in 2021.

Source: “US Equity Strategy in Pictures,” BofA Global Research, April 2021

 

We're expecting to see, you know, 30% or so earnings growth by the end of the year.  So this is a year where I think the real story is less in the market's price action and really more about earnings.

 

You know, in fact, we've seen the P/E multiple compress this year, but earnings have really driven the lion's share of performance. So it's, you know, it's a year where you really need to cheer on corporate America for delivering on the bottom line.

 

Chris Hyzy:

Thank you, Savita. Now Haim, let's switch to you. The reopening is gathering momentum. Corporate profits, as Savita has said, are accelerating. Let's look at some of the larger themes you and your team have been researching, a number of which have taken on a lot more significance during and through the pandemic.

 

One is the growing convergence of technology and healthcare. Talk about some of the changes we're seeing there.

 

Haim Israel:

Thank you so much, Chris.  Yes. This is probably going to be one of the most interesting and impactful things going forward. 

 

[LOWER 3rd]

Haim Israel

Head of Global Thematic Investing Research,

BofA Global Research

 

Did you know that we spend $10 trillion every year, $10 trillion on healthcare services, but we are wasting 40% of this number -- 3.5 trillion to $4 trillion every year? (Source: World Health Organization)

 

That was using very old technologies, last century technologies.

 

[GRAPHIC]

New world of high-tech healthcare

·         Big Data

·         Artificial Intelligence (AI)

·         Simplified drug development

·         New care treatment

·         Telemedicine

 

The new world is going to be a world that you're going to start using big data, AI, new technologies, in order to simplify the process of drug development, of new care treatment. Telemedicine, we're going to use data, we're going to use fast internet and networks in order to transmit data going forward.

 

And that's going to dramatically decrease the cost. That's going to dramatically increase the efficiencies in industry and develop new drugs, increase life expectancy.

 

[GRAPHIC]

New world of high-tech healthcare

·         Big Data

·         Artificial Intelligence (AI)

·         Simplified drug development

·         New care treatment

·         Telemedicine

·         Genomics

 

Second thing, genomics. All of our data is at the tip of hands.  Today we can sequence our DNA for $100. Ten years ago, 20 years ago, it was roughly $2.7 billion. Now for $100, we have so much information.  (Source: National Human Genome Research Institute, 2020.)

 

The last thing I want to just highlight in that one is that healthcare is the fastest growing database on the planet. Medical healthcare is more data is multiplying itself every 73 days and we're using 0.4% of it. (Source: ACCA, KPBC.) Think about how much value we we're losing. Technology is the way for a much better healthcare system going forward.

 

Chris Hyzy:

Now Haim, we've talked about this concept of the new frontier, whether it's 2022 and beyond or just in a post pandemic world.  History has shown that large scale disruptions, as painful and potentially tragic as they are, have always been followed by a new wave of innovation, creativity and potentially productivity.

 

What do you see as the key themes and trends that are likely to drive global growth in the years ahead, as we move beyond the pandemic?

 

Haim Israel:

Completely agree with you, Chris.  What we've seen is this pandemic actually accelerated a lot of the mega trends. We've seen data creation multiplying faster and faster and we're seeing more and more technologies which have been implemented.

 

I think that the key thing here is it's not just this pandemic has unleashed a lot of new technologies. It’s unleashed much bigger mega trends here and that's going to be, we believe, the race for global supremacy.  What we call the new world order and unveiled in much bigger scale the fight between China and the United States, which is going to lead to a completely new environment. Then we think going forward, it's going to be probably around climate wars.

 

[GRAPHIC]

Growing investment trends

·         Infrastructure

·         5G Wireless

·         Telecommunications

·         Cloud computing

·         Cleantech

So all of that is going to accelerate dramatically investment in new infrastructure, 5G, telecom infrastructure, cloud and so on. And then it's going to increase dramatically Cleantech because the two superpowers understand that going forward, the way to gain global supremacy is going to be around who is going to dominate climate action or is losing its global dominance in the long term.

 

It's going to be a very different world in the next couple of years.

 

Chris Hyzy:

Fascinating, Haim.  Now, Savita, from your perspective, speaking of powerful trends, given the trends that Haim just discussed, what might this mean for different industries and sectors? And are there any key areas you're specifically watching in the short and long term?

 

Savita Subramanian:

Yeah, I mean, Haim touched on a lot of great points and I want to drill down on two of them. The first is healthcare. One of the reasons that we are overweight healthcare as a sector is we think that Haim is absolutely right.

 

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The healthcare sector could benefit from increased

spending by companies, governments and individuals.

 

The pandemic changes the way companies, governments and individuals think about spending. And we think that we're going to see more money diverted towards healthcare.  So I think that healthcare is a big theme, not just for the next, you know, six months, but for potentially the next leg of this bull market.

 

Now, the other theme that I think is potentially a little bit more at risk from issues that were essentially augmented during 2020 are multinationals -- big global companies that rely on supply chains, which have up until 2019 been relatively frictionless.

 

You know, I think a lot of our work suggests we are at peak globalization today and we're starting to see supply chain risks. We're starting to see trade wars, tech wars, you know, a lot of the themes that Haim discussed on a tech -- technology level are really dividing the world.

 

[LOWER 3rd]

Domestically-oriented sectors and stocks could benefit

from more localized supply chains and trade frictions.

 

We think there could be a little bit of a shakeout and we would move towards more domestically oriented sectors and stocks. Yet another reason we like financials.  Energy in the U.S. is producing -- is now a net producer of energy products for U.S. consumers.

 

These are areas that we think are a little bit more shielded from some of the frictions that we've seen on a global basis.

 

Chris Hyzy:

Now I want to touch on one key point you made there as well about multinationals and domestic-oriented companies. Are you overly concerned about a potential hike to corporate taxes and what that could do to the overall profit landscape in the United States?

 

Savita Subramanian:

I don't know if I'm overly concerned but I think that it is something we need to think about. And it's one of the reasons that we're a little less bullish in the second half of the year, because we think that headlines in the U.S. are going to shift from fiscal stimulus and recovery to how are we going to fund all of this growth.

 

And if we do see any sort of reversal in the tax cuts under the last administration, the areas that would be hardest hit would be some of the big global sectors like technology, like communication services -- or tech, media and telecom. So these are areas where we see a little bit more of a hit to the bottom line.

 

Ultimately, tax changes are not a hit to the economic profitability of corporations, but it is something to keep an eye on, you know, especially from a negative headline perspective as we move towards the end of the year.

 

Chris Hyzy:

Thanks Savita. Now, Haim, Michelle talked a little bit about job growth. Now, let's talk about some very interesting research you and your team have done on the future of work. It sounds like the jobs and careers of today could look completely different several years from now.  Tell us what the “help wanted” ads of the future could look like.

 

Haim Israel:

Sure thing, Chris, and if I can give one advice is be very, very mindful what our kids are going to study today, kids and grandkids what they're studying today. Because as you said, the job market in the future is going to look so different from what it is today.

 

Automation is coming, AI is coming, robotics are coming and going to take a big part of the current work that we're doing today.

 

But let me reassure you on three points. First of all, I do not believe that mine and our research support that the number of jobs worldwide are going to decrease.

 

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Robotics and automation could create 12 million

net new jobs around the world by 2025.

Source: World Economic Forum, 2020

 

We believe that robotics and automation and AI will create 12 million net jobs worldwide, but we believe that all jobs are going to be different.

 

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One billion people in the global workforce

could need new training and skills.

Source: World Economic Forum, 2020

 

One billion people, roughly one third of the global workforce will have to be retrained going forward.

 

So the jobs of the future are going to be very different. What are they going to be?

 

[GRAPHIC]

The jobs of the future

“Green collar” jobs related to:

·         Sustainability

·         Climate change

 

Source: “Robo Sapiens: Future of Work Primer,” BofA Global Research, May 2021

 

First of all, green collar, that's going to replace blue and white.  Green collar are the jobs and professions which are related to the sustainability and climate change industry.

 

So already today, the two most demanded jobs in the United States are in the wind and solar industries. (Source: U.S. Bureau of Labor Statistics, 2020.)  And we believe that's going to grow dramatically going forward. Already today, by the way, more people work in the renewable energy industry in the United States then people working in restaurants or bars or the food industry.

 

[GRAPHIC]

The jobs of the future

“

“Care economy” jobs, including:

·         Doctors

·         Teachers

·         Nurses

·         Social workers

·         Psychologists

 

Source: “Robo Sapiens: Future of Work Primer,” BofA Global Research, May 2021

 

The second thing is the empathy market as we call it, the “care economy.”  Those are professions, which are going to be less likely to be replaced by automation in the short run: doctors, teachers, nurses, social workers, psychologists and so on. Those are jobs that are going to be safer.

 

And the third element, which is likely looking more long-term is that 65% of all the jobs that our kids and grandkids would work in have not been invented yet. (Source: World Economic Forum, 2020.)

 

[GRAPHIC]

“Far out” jobs of the future

o   Space tourist guides

o   3D food printer chefs

o   Ethical algorithm developers

 

Source: “Robo Sapiens: Future of Work Primer,” BofA Global Research, May 2021

 

We give a couple of really out of the blue left field examples, like space tourist guides, for example, 3D printed food chefs or ethical algorithm developers. Those are going to be some ideas in the future, but it's going to be fascinating.

 

A lot of the jobs are not going to be great. More jobs will be there, but they're going to be very, very different jobs in the future.

 

Chris Hyzy:

Now, Savita speaking about the future with all these changes, as they work themselves out, that Haim discussed, we cannot talk about something called volatility when we're talking about the markets. Should investors be prepared for an increase in volatility along the way?

 

Savita Subramanian:

Oh, absolutely, Chris and I think that, you know, Haim laid out a world that is changing very rapidly. And think about the last couple of years. I mean, we saw the fastest bear market we've ever seen and then a massive recovery off the bottom.

 

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Investing rules of thumb:

o   Use volatility to capture new opportunities 

 

So I think two rules of thumb: at a stock and a sector level be nimble.  Volatility is your friend when it comes to security selection.

 

I think the other rule of thumb from an asset allocation perspective is to play the long game. And what I mean by the long game for assets is if you think about equities, one of the biggest advantages we have as equity investors is to extend our time horizon. 

 

[GRAPHIC]

Investing Rules of Thumb:

o   Use volatility to capture new opportunities 

o   Maintain a long-term time horizon

And we found that, you know, the S&P 500 on a daily basis it's about a coin flip, whether you make or lose money in the S&P 500.  But over a 10 year time horizon, your probability of losing money drops to just about 5%. (Source: S&P, Bloomberg and BofA U.S. Equity & Quantitative Strategy, as of April 2021).

 

And here we think that the S&P 500 is likely to be one of the better performing asset classes over the next 10 years relative to other areas of the market. But the name of the game is to use volatility to your advantage, be nimble, but also avoid emotional, reactive selling.

 

Chris Hyzy:

That's a great segue, Savita, to go into another area that is actually growing more momentum each day, each week, each year across the investment landscape -- is environmental, social and governance, also known as ESG.

 

Take us through how you see ESG gathering momentum in the near future.

 

Savita Subramanian:

Yeah, we're nowhere near done with ESG. Haim said it best when he pointed out that the new wave of jobs are going to be green collar, not white collar, not blue collar.  So this is something we need to embrace. And I think that the important things to look at are companies that are on the path to improvement via sustainable goals.

 

So, for example, you can take an energy company in a so-called brown sector, but if that company has a clear path for becoming carbon neutral, for investing in renewables and sustainable areas of the marketplace, you know, we think that that is actually a viable theme to invest in. And we urge our clients to really think hard about incorporating these themes into their portfolios, because this theme is not going away. 

 

Chris Hyzy:

Fascinating insights and perspectives. Thank you, Savita.

 

Savita Subramanian:

Thank you.

 

Chris Hyzy:

And thank you as well, Haim.

 

Haim Israel:

Thank you so much, Chris.

 

Chris Hyzy:

Always great to speak with you both.

 

[LOWER 3^rd]

Chris Hyzy

Chief Investment Officer

Merrill and Bank of America Private Bank

 

For the final part of our program, I’m pleased to be joined by Rick Rieder. Rick is Chief Investment Officer of Global Fixed Income and head of the Global Allocation Team for Blackrock, the largest asset manager in the world.

 

Rick, thanks very much for joining me.

 

Rick Rieder:

Thanks, Chris. Thanks for having me on.

Chris Hyzy:

Now, you have decades of experience as a fund manager and overall market watcher. What do you think the pandemic has taught us about the resiliency of markets and the economy?

 

[LOWER 3rd]

Rick Rieder

Chief Investment Officer of Global Fixed Income and

Head of the Global Allocation Team,

BlackRock

 

Rick Rieder:            

A couple of things that resonate and particularly after and through this COVID dynamic.

One is that how important policy is. 

 

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The pandemic showed how important policy is,

including both fiscal and monetary.

 

I actually think the administration, they were pretty aggressive around what they did in terms of fiscal policy, including taking risks that Congress would pass some initiatives to move fiscal, which was hugely important, to move that forward. But then I also want to throw out that monetary policy was obviously extraordinarily important.

 

I think history will chronicle when the Federal Reserve stabilized the top end of the capital stack, when you think about the companies that were going to go out of business, big employers that were going to go out of business?

 

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“Capital stack” refers to different types of financing,

such as corporate bonds, municipal bonds and mortgages.

 

When the Fed did what they did on investment-grade credit, municipal bonds, the top part of the capital stack in residential mortgages, commercial mortgages -- that was pretty impactful.

 

Then Chris, last thing I’ll say, I actually think people underestimate the resiliency of the U.S. economy and the innovation that takes place in the U.S. economy, how flexible and how innovative it is.

 

Think about how we moved to Zoom and how we moved to Amazon as the shopping mechanism and obviously all the other companies around that, Peloton, etcetera.  I’m actually I’m incredibly impressed with how adaptive the U.S. economy is and quickly.

Chris Hyzy:

As we go into a reopening, further into a reopening and then post-pandemic, where do you see potential opportunities across asset classes, including fixed income and equities.  And also what are some of the danger signs or risks that you’re looking out for?

 

Rick Rieder:            

Listen, I think the economy will continue to grow. I think people underestimate how fast we’re going to grow this year.

 

What that means for equities and for companies, I think top line revenue is going to continue to be strong. I think earnings will continue to be very robust and so I think the opportunities side –

 

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Stocks of companies with strong cash flow and high

Return-on-Equity (ROE) could provide opportunities.

 

You know, we’re spending a lot of time on companies that are what I call are in the fast rivers of cash flow, high ROE companies, that pivot off of the infrastructure that we’ll get; that pivot off of what is a reopening, manufacturing.

 

So I think there are great opportunities in equities. I think technology, I think healthcare are places that make a lot of sense. I actually think Europe as it reopens is a great place for opportunity today.

 

Secondly, fixed income, listen, I think you have to manage fixed income differently than we have in the past. What the Fed did is create this crowding-out effect. Things like Treasuries, agency mortgages, the securitized asset class which we talked about, not only they stabilized the top part of the cap stack, but much of it trades at zero spread today, which is an almost extraordinary dynamic.

 

We think doing things in more bespoke in securitized assets, commercial real estate, residential real estate, more loans today than high yield. I think the high yield market has gotten very tight, but loans are still interesting, so we think there are some opportunities there.

 

The big risk for markets is I think, going forward is away from variant risk and COVID, etcetera, which we know is a top part of the risk dynamic. China is something we’ve got a close eye on because people underestimate how big a driver of global growth that is, particularly how it affects Europe, how it affects emerging markets. So we’ve got a big focus there today. We think it’s slowing but we think China’s pretty thoughtful about how they manage that economy.

 

And then we’ve got to follow the trajectory of growth. There are some areas that could slow a bit, so I think the second half you’re going to see significantly more volatility than you’ve seen over the last couple of months or so.

 

Chris Hyzy:             

You’ve been following the dollar across your career for many, many decades. What are your thoughts about the term “reflation” and how to invest around it?

 

Rick Rieder:            

I do think that the Fed is largely right around the transitory nature of inflation. So much of what has driven a spike in inflation near term has been the reopening components, chip shortage, used and new car prices, and I do think you’re going to see that stabilize.

 

And I think commodity prices, there has been obviously not enough capacity in what has been this rapid reopening in places like steel, like iron ore generally, copper, energy, etcetera. So I do think that those will -- you’ll see capacity built there and I do think you’ll see a lot of that that will come back to normal.

 

I could see some marginal depreciation of the dollar, but I don’t think it is going to be that significant because too much of the world relies on dollars. And quite frankly, so much investment comes into the U.S. and will continue to, that I think the dollar stays more stable than people anticipate.  

 

Chris Hyzy:

Okay. Rick, one of the concerns we hear about quite a bit, more so in the beginning of the year than in the middle of the year, but it started to pick up again is the tax question.

 

Can you give us your thoughts for the individual investor, particularly the long-term individual investor on how to think -- or some of your concerns you may have about a hike in taxes, whether it’s corporate taxes, capital gains or income taxes? Tell us your thoughts there.

 

Rick Rieder:

We’re in a very different environment than we’ve been in for many, many years. By the way, not just in the U.S. but globally, where we’re going to see more fiscal spend. We’re going to see more stimulus put in the system. The flipside of that is taxes are going higher, and I think that people have to consider the fact that we’re going to have to fund a good deal of the stimulus.

 

From an individual investor point of view, I think about, gosh, where is that going to come from? My sense is cap gains is probably going to go up. I don’t think it’s going to go all the way up to the personal tax rate that people talked about, but I think it’s going to go up to 28%.

 

And I think over time, the corporate tax rate is going to go up. I think that will go up to 25% which is not an onerous number. I don’t think it should create a lot of volatility in markets on the backside of it.  But I think personal income tax is probably going to go higher over the next few years.

 

[LOWER 3rd]

In a potentially rising tax environment, consider

using tax-efficient strategies in your portfolio.

 

So, I think from an individual investor point of view, if you think about, “gosh, I’ve got to think about my portfolio on an after-tax basis.”  So some of the strategies that involve whether it’s municipal bond, some of the strategies that are thoughtful about where am I going to generate return on the tax-efficient basis, it’s something that’s going to be really important going forward.

 

Chris Hyzy:

From the standpoint of the individual investor, quick thoughts on diversification as it relates to where we are in the business cycle, the market cycle and again, that path forward over the next couple of years. What are your thoughts there?

 

Rick Rieder:            

I’m a big believer in diversification. However, I’m a big believer that you’ve got to be adaptive to the environment. 

 

I think a key form of a diversification today is get into these companies and just try -- that are running and have been running persistently high ROE and do that across a number of companies and a number of industries.  And I’m just convinced that as an individual investor, if you look at your portfolio three years hence, you’d say, “geez that worked out for me. You know, I went through some volatility but I feel pretty good about where I am at the end of that period.”

 

I just don’t think managing it month-to-month, I think that’s hard and I think you just got to think about where are we going and where am I going to be invested that I’m going to feel good about over the long term. 

 

Chris Hyzy:

Well, that’s a great note to end on. Rick, thanks again for all of your insights and thoughts today.

 

Rick Rieder:            

Thanks, Chris. Always great doing it with you.

 

Chris Hyzy:             

And thanks to all of you for joining me. Here are a few final thoughts to keep in mind.

[GRAPHIC]

Steps to consider from here

·         Review your asset allocation 

and rebalance as needed

 

First, be sure to review your asset allocation to ensure it’s in line with your long-term goals.  And where appropriate, take advantage of any pullbacks in the markets to rebalance, as needed.

[GRAPHIC]

Steps to consider from here

·         Review your asset allocation

and rebalance as needed

·         Be sure you’re well diversified across

and within asset classes

 

Next, be sure you’re well diversified both across and within various asset classes, including equities and fixed income.  And consider more cyclical areas that tend to do well in the economy is expanding.  But balance this with the growth side of the equity markets, given our view that global investment themes are just beginning to gather momentum.

[GRAPHIC]

Steps to consider from here

·         Review your asset allocation

and rebalance as needed

·         Be sure you’re well diversified across

and within asset classes

·         Maintain a disciplined investment process

and stay focused on your goals

 

Finally, remember that investing is about having a consistent and disciplined process, not overreacting to negative headline news or events and maintaining a clear focus on your long-term financial goals.

 

An advisor is a great resource for helping you understand how the ideas discussed in this program fit into your overall picture. If you’re working with an advisor, we hope you’ll continue the conversation with them.

 

Thanks again for watching and we wish you a safe, healthy and happy rest of the year.

 

 

 

IMPORTANT INFORMATION

All data is as of 7/07/2021 and subject to change.

                 

Rick Rieder and BlackRock are not affiliated with Bank of America Corporation.

 

Any opinions expressed herein are given in good faith, are subject to change without notice, and are as of the date of this program.

 

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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.

 

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

 

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