The Latest on Coronavirus, the Markets and the Economy

April 8, 2020

When Could the Markets Recover? 5 Signs to Watch

BEFORE THE MARKETS CAN RECOVER from the massive downturn created by the coronavirus, they need to “find a bottom,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That process is already well underway, he adds, with significant progress being made on three of five fronts. “We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.”

Of course, everything still depends on finding answers to the health crisis that continues to threaten the lives of millions across the world, Hyzy adds. And considering the number of jobs lost and businesses shuttered, recovery will be slow, with GDP growth unlikely to return until 2021.

Below, Hyzy offers a progress report on the signs the CIO is watching that may indicate the markets may be reaching their bottom and could turn the corner towards recovery.

Sign #1: Capital flows more freely. Amid a wave of panic selling by investors in March, the Federal Reserve (Fed) promised to buy unlimited amounts of government debt and lend money to local governments and businesses to help keep capital markets from drying up. Such policies appear to be working, Hyzy says. “Capital is flowing more freely and fixed income markets are acting in a more stable manner, even as we speak.”
✔ Status: Underway

Sign #2: Stock-bond relationship normalizes. In normal market conditions, bond prices tend to rise as stock prices fall, and vice versa, so having both in a portfolio helps mitigate risk. In March, bonds and stocks dropped in tandem as investors sold them in search of cash. With stimulus helping to stabilize bond markets, the inverse relationship between stocks and bonds is returning—a key sign of market stability, Hyzy says.
✔ Status: Underway

Sign #3: Volatility eases. “Market volatility went above 80 in mid-March, the highest on record,” Hyzy says—as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The March 16 closing of 82.69 was higher even than the 80.86 level in November 2008, at the onset of the financial crisis.¹ “Currently, the VIX has fallen below 50,” Hyzy notes. “More importantly, it has fallen on days when markets are down.”
✔ Status: Underway

Sign #4: U.S. dollar weakens. Amid a global scramble for less risky currencies, the dollar has shot up in value during the current virus crisis. “This can hurt the economies and finances of emerging market countries, given their high exposure to U.S. debt, and delay the eventual recovery overseas,” Hyzy says. “Though there are signs the dollar may be cresting, we need to see some consistent weakening.”
✔ Status: Needs improvement

Sign #5: Bad news is taken in stride. One crucial sign of stability is when markets have already factored in the effects of the coronavirus on the economy and can absorb daily developments without panicking, Hyzy believes. “We’ve seen this sporadically, but it needs to be more consistent.”
✔ Status: Needs improvement

What can investors consider doing now?
The recovery, when it comes, will likely reveal an economy forever changed, Hyzy notes. We’ll see a world focused on localization rather than globalization, where technology and remote work take precedence. “It’s going to be ‘e-Everything,’ from our perspective—e-Learning, e-Medical, e-Sports, e-Social interaction and e-Work,” he says.

In the meantime, as the economy and markets find bottom, “quality, yield and growth are three factors to continue to emphasize,” Hyzy says. That may include stock and bond investments in large, well-run U.S. companies, he adds.

For latest insights on the markets and the economy, listen to the Daily CIO Audiocast.

April 3, 2020

What Do the Q1 Numbers Tell Us About the Rest of the Year?

THE FIRST QUARTER OF 2020, launched amid economic growth, broad optimism and low unemployment, ended on Tuesday, having set records that few could have foreseen. “The Dow Jones Industrial Average and the S&P 500 finished their worst quarter ever, down 23% and 20%, respectively,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. 

With the virus continuing to spread and nearly 10 million Americans filing jobless claims in the past two weeks alone, it’s possible a full recovery may not come about until the end of 2021. “To put it bluntly, in April and possibly May the financial markets and economy are likely to see some of the sharpest downturns in history as the shutdown takes full effect,” Hyzy says. But, he adds, “It’s important to remember what’s driving the downturn. This is a health-care crisis; before it began, the fundamentals of our economy were strong.”

What could the next three quarters bring?
With travel curtailed and millions of Americans confined to their homes, it’s no surprise that spending on airlines, hotels and restaurant visits has plunged. “But we’re also beginning to see much lower spending on other types of discretionary purchases, things like clothing and furniture,” says Michelle Meyer, head of U.S. Economics, BofA Global Research. “Consumers are much more concerned right now about their finances and health, and much less willing to spend.”

As a result, U.S. GDP is likely to shrink by 30% during the second quarter on an annualized basis, Meyer says. GDP will likely contract by a cumulative 10.4% over the first nine months and then recover somewhat in the fourth quarter to finish full-year 2020 with GDP growth of -6%.  “That would be the steepest recession on record and nearly five times more severe than the average of all recessions since World War II.”

What are the longer-term prospects?
While we’re undoubtedly looking at an arduous recovery ahead, the trillions of dollars in stimulus programs by the Federal Reserve and Congress have prevented a bad situation from becoming much worse, says Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research. “We expect companies will work out their bad news during 2020,” she says. And while earnings aren’t likely to return to pre-coronavirus levels until 2022, “we’re anticipating earnings growth in the range of 25% to 35% for 2021. That’s a pretty strong recovery.”

What can investors do now?
As the economy and markets begin to bottom out in the weeks ahead, investors who avoid panic selling may find opportunities to rebalance their portfolios and invest towards an eventual recovery, Hyzy says. Still, everything depends on answers to the question the whole world is asking: When will the health crisis ease? “Science is what gets us back to a new normal,” he adds.

For more insights, read “Whatever It Takes: The U.S. Policy Response to COVID-19,” from the Chief Investment Office, and tune in to the Daily CIO Audiocast.

April 1, 2020

What You Need to Know About the IRS Tax Extension

TO HELP TAXPAYERS WEATHER THE ECONOMIC IMPACT of the coronavirus, the IRS has postponed the traditional April 15 federal income tax filing and payment deadline by three months to July 15. “During the three-month postponement, taxpayers won’t be subject to interest or penalties for filing after April 15,” says Mitchell Drossman, National Director of Wealth Planning Strategies for the Chief Investment Office of Merrill and Bank of America Private Bank.

A recent report by the Chief Investment Office, “Tax Alert 2020-02: Tax Payment and Filing Deadlines Postponed in Response to Pandemic,” answers some key questions you may have about the extension and your personal taxes. The IRS continues to issue guidance on taxpayer relief, so please check with the IRS’s Filing and Payment Deadlines Q&A site for the very latest information. As always, it’s best to consult your tax advisor for guidance on what the tax extension might mean for you.

Who qualifies for the postponement?
The relief applies to any taxpayer with federal tax returns or payments usually due on April 15. That includes individuals, trusts, estates, partnerships, associations, companies and corporations. There are no limitations on the amount of tax that may be postponed, and taxpayers do not need to make a formal request in order to take advantage of the postponement.

What tax filings and payments are or aren’t covered?
The provision applies to all 2019 federal income taxes and self-employment taxes. Self-employed people may also postpone paying their estimated quarterly taxes for the first quarter of 2020, normally due on April 15, until July 15. But self-employed taxpayers should keep in mind that their estimates and payments for the second quarter will still be due on the usual date of June 15.  

In addition, IRS Notice 2020-20 automatically postpones the traditional April 15, 2020, deadline for filing gift and generation-skipping transfer tax returns and making payments of gift and generation-skipping transfer tax to July 15, 2020.

Does this mean more time to contribute to an IRA or Health Savings Account?
Yes, in FAQs at its Filing and Payment Deadlines Q&A site the IRS states that the deadlines for 2019 contributions to IRAs and health savings accounts are extended from April 15 to July 15. (The IRS site cautions that the answers to its FAQs are not citable as legal authority.)

Are state and local taxes postponed as well?
“States generally follow the federal due dates, but it’s best to check with your individual state,” Drossman says. While many states have already announced plans to extend their filing and payment deadlines to July 15, 2020, a few have not yet announced extension plans.

Can taxpayers file for an automatic extension beyond the July 15 deadline?
Taxpayers have traditionally been able to request a 6-month tax filing extension by submitting the proper paperwork by April 15—a move that’s particularly useful for filers whose taxes are complex. However, they’ve still been required to pay their taxes by April 15. Under this year’s tax postponement, the deadline for requesting this extension is now July 15. If the extension form is filed by July 15, 2020, taxes will be owed on July 15, 2020, and the tax filing deadline becomes Oct. 15.

Is there any reason not to take advantage of the federal extension?
If you believe you have a refund coming this year, filing your return on April 15 rather than taking the postponement could mean that you receive it sooner. Whatever your situation, it’s important to speak with your tax advisor before making any decisions.

Check back for regular updates on this page, and tune in to our Daily CIO Audiocast for latest insights on the coronavirus and the economy.

March 27, 2020

Can a Historic Stimulus Package Help Right the Economy?

The president has signed a historic $2 trillion stimulus package aimed at stemming the economic impact of the coronavirus. That measure comes on the heels of the Federal Reserve (the Fed) promising to buy unlimited quantities of government debt and lend money to businesses and local governments alike. “There may not even be a word in the dictionary to adequately describe what we’re going through right now, except maybe ‘unprecedented,’” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.

What are the policies trying to achieve?
The $2 trillion U.S. fiscal stimulus aims to help keep the economy going by distributing money directly to businesses to help them avoid layoffs, and to individuals and families affected by the crisis, to enable them to keep paying for necessities. Likewise, the Fed is purchasing financial assets to help keep money flowing through the economy at a time when investors have been selling at a furious pace.

Monetary policies are already having some positive effects, Hyzy says. “Capital is flowing more freely in the bond markets, and there’s better liquidity, though we still have a ways to go.” Still, fiscal and economic policies, no matter how large, can’t drive a recovery that first and foremost depends on signs that the health crisis is easing. “The heart of the issue continues to be the health data, and when infection rates crest,” Hyzy says. “We’re obviously not there yet.”

According to Michelle Meyer, head of U.S. Economics, BofA Global Research, “What the fiscal and monetary policies can do is to keep enough of the economy running that once we get past the shock of the virus, there’s an economy to return to.”

What could happen next?
As the record 3.3 million Americans filing for unemployment benefits last week makes clear, the economic crisis is far from over, says Meyer. “Jobs data for April, which will be released in early May, could reveal 4 to 6 million Americans with lost jobs, and an unemployment rate nearing 7%,” Meyer says.

Depending on when the health crisis eases, the economy could still “snap back,” thanks to pent-up demand from millions of consumers currently staying home, Meyer says. “More likely, though, we’ll see a long, slow, lackluster recovery with lots of bumps,” she adds. “There’s an important psychological element here, with people displaced from the workforce, quarantining and sheltering. It will take time for them to overcome fear and re-engage.”

What can investors consider doing?
“The three watchwords for a portfolio during times like these are growth, yield and quality,” says Michael Hartnett, Chief Investment Strategist, BofA Global Research. “You need exposure to growth because there’s not a lot of it around right now.” Promising areas may include technology, health care and consumer staples, notes Hyzy. “With U.S. Treasury rates at historic lows, investors may find potential for yield with investment-grade bonds, municipal bonds or dividend-paying stocks," he adds. Quality means exposure to stocks or bonds of companies with especially strong balance sheets. Your advisor can help you review your current investment mix in light of the current market environment.

For more insights, read “Staying the Course Through Volatility: A Disciplined Financial Strategy Roadmap,” from the Chief Investment Office, and listen to our latest Perspectives podcast “Coronavirus and the Markets.”

March 23, 2020

Tune in to Our Podcast: “Coronavirus and the Markets”

As the country and the world grapple with a still-expanding global pandemic, international economic activity has been disrupted and markets have been wildly volatile in recent weeks. While staying safe and healthy is uppermost in everyone’s mind, people are also understandably concerned about the long-term effect the virus may have on the economy, markets and their own financial lives.

“One thing is clear: We are living in unprecedented times,” says Candace Browning, Head of BofA Global Research. Browning hosts a new “Market Edition” of the Perspectives podcast offering insights on the critical questions investors are asking right now. Questions like: Should I pull back on stocks, or could this represent a buying opportunity? What areas of the market offer potential for growth? Will government policies help the economy? Listen to the conversation here.

Podcast Participants:

• Candace Browning, Head of BofA Global Research
• Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank
• Jared Woodard, Director for Global Investment Strategy, BofA Global Research

What investors can consider doing now
While no one alive has seen a situation quite like the mass global shutdowns spurred by the coronavirus, history does speak to the importance of staying invested through severe market turbulence, says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. “We know that the best days often follow the worst.”

That said, Hyzy adds, “Diversification can show some of its greatest benefits in the most difficult times. It’s important to have a disciplined plan and rebalance periodically as capital market activity continues to unfold.”

“If history is any guide, this is a moment to hold on,” agrees Jared Woodard, Director for Global Investment Strategy, BofA Global Research. “If I could give some non-market advice,” he adds, “just take care of each other.”

Listen to more Perspectives podcasts at "privatebank.bankofamerica.com/podcast."

March 18, 2020

What Will It Take to Stem the Volatility?

Investors should expect sharp ups and downs in the markets until coordinated health policies begin to turn the tide on the coronavirus, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Whereas other financial crises have been addressed by fiscal and monetary policy alone, “this time, investor confidence depends first on answers to biological questions, such as how deep the health crisis will become and when the virus will be contained,” Hyzy says.

A new Chief Investment Office report, “The Process Begins,” suggests that coordinated health, fiscal and monetary policies in the United States and globally will be needed so that markets and the economy can find a firm floor on which to build a recovery.

Where do things stand now?
The “bottoming out” process will likely involve two phases, Hyzy suggests: First, when markets gain confidence that policies are working. Second, when they start to assess the impact on corporate earnings and the economy.

One bright spot: compared with the financial crisis of 2008, the U.S. economy was in a stronger position when the virus outbreak occurred. “In 2008, there were much more daunting questions encircling the financial system, and the consumer was not on solid footing,” Hyzy says.

Yet given the many unknowns and the magnitude of the challenge, with S&P 500 asset values down 30% so far, these questions may take weeks or even months to resolve, Hyzy says. And financial estimates are likely to change frequently as the crisis evolves.

How are policymakers responding?
One of the biggest challenges for health officials right now is learning the effect that “social distancing” and other containment policies currently being enacted state by state and locality by locality are having in slowing the spread of the virus, Hyzy says. Better data and more coordinated policies will help from both a health and economic perspective, he believes. “Knowing how long people will have to stay home will help determine how consumers and businesses will manage through the crisis as well as the depth of any economic contraction.”

Clearer health information can in turn help sharpen fiscal policies (such as government spending or tax relief) and monetary policies (such as the Federal Reserve’s interest rate cuts and lending programs) aimed at stimulating the economy, Hyzy believes. “This is already happening, but more is needed.”

What can investors consider doing?
Such conditions call for patience and avoiding giving in to panic. “We believe long-term investors should consider rebalancing their portfolios back to stay in line with their underlying strategies,” Hyzy says.

Current conditions favor high-quality investments across and within asset classes, including large U.S. companies whose dividends may help compensate for the reduced income potential of bonds, Hyzy notes. Bonds remain important to help mitigate risk in a portfolio. He adds, “Maintaining a well-diversified portfolio while rebalancing over time is vital to investing towards your goals.”

For more information on the coronavirus and the markets, read the Chief Investment Office’s latest “Investment Insights” report, "The Process Begins."

March 16, 2020

Will the Federal Reserve’s Latest Move Be Enough to Calm Investors?

The Federal Reserve (Fed) lowered its benchmark interest rate nearly to zero on Sunday. It was the second emergency rate cut in two weeks and the latest evidence of the serious threat that policymakers believe the coronavirus poses to the economy and markets.

Investors should expect these extremely low interest rates to persist even after the economy starts to improve, says Michelle Meyer, head of U.S. Economics, BofA Global Research. “The Fed is not just cutting in the face of this shock, with a quick reversal thereafter,” believes Meyer.

Also on Sunday, the Fed announced that it will begin a new round of “quantitative easing” by purchasing $700 billion in United States Treasurys and mortgage-backed securities over the coming months. Quantitative easing was one of the primary responses the Fed used to help stimulate the economy during the financial crisis of 2008.

What do these steps mean?
The Fed’s actions are a positive step, but just the start of what’s needed to calm markets, says Mark Cabana, head of U.S. Interest Rate Strategy, BofA Global Research. “We think the proper policy response will require coordinated and forceful action from all branches of government.” At the same time, he cautions that further policy responses, while necessary, may not be able to prevent the economy and markets from weakening further as businesses shutter their doors and families self-quarantine.

What can investors consider doing?
How the markets respond moving forward “is subject to further policy responses,” notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “The best course for these unsettling times is to remain focused on your long-term goals and on diversification across and within asset classes. Avoid panic selling,” he says. Though extremely low interest rates reduce the income potential of bonds, they remain an important part of a portfolio, mainly as a way to mitigate risk, he notes.

As for stocks, history shows that even through difficult times markets and the economy eventually do improve, Hyzy adds. Selling investments out of fear right now could potentially lower diversification benefits and prevent investors from experiencing gains when coronavirus-related volatility ultimately subsides and economic activity begins to recover.

In a new audiocast, Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, and experts from BofA Global Research share their thoughts on what’s driving the volatility, how long it may continue, and when we might see the return of long-awaited stability. Listen to their conversation below.