Skip to Content
Bank of America Coronavirus Resource Center See details

The Latest on Coronavirus, the Markets and the Economy

Updates and insights from our Chief Investment Officer

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.

during the three month postponement, taxpayers won't be subject to interest or penalties for filing after april 15th

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.

“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.” 

Michelle Meyer, head of U.S. Economics, BofA Global Research

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.”

“The three watchwords for a portfolio during times like these are growth, yield and quality.” 

Michael Hartnett, Chief Investment Strategist, BofA Global Research

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.

Now is the time to develop a plan of action so that it's ready to put into place when volatility subsides. says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. Listen to the audiocast for more insights.

Listen to our podcast

Coronavirus and the Markets

Download Transcript

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.

We think the proper policy response will require coordinated and forceful action from all branches of government.” 

Mark Cabana, head of U.S. Interest Rate Strategy, BofA Global Research

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.

March 13, 2020

What’s Driving Volatility, and What Could Be Next?

The Dow Jones Industrial Average dropped 10% on Thursday—the worst single-day drop in more than 30 years1—offering fresh evidence of the severe effect the coronavirus is having on markets, as well as people’s health. “This is a shock unlike what we’ve seen before,” says Michelle Meyer, head of U.S. Economics for BofA Global Research. “People are fearful, and they are responding.” Yet while the U.S. economy may “flirt with falling into recession” in the second and third quarters, containment of the virus could still lead to a turnaround this year, she says.

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.

Hyzy leads this important discussion featuring:

  • Mark Cabana, Head of U.S. Interest Rate Strategy, BofA Global Research
  • Michelle Meyer, Head of U.S. Economics, BofA Global Research
  • Savita Subramanian, Head of U.S. Equity and Quantitative Strategy, BofA Global Research
  • Michael Hartnett, Chief Investment Strategist, BofA Global Research

What investors can consider doing now
One of the hardest things for any investor to do right now is also among the most important: Hold tight, Hyzy says. But holding tight doesn’t mean doing nothing. “Now is the time to develop a plan of action so that it’s ready to put into place when volatility subsides.”

Investors should prepare to rebalance or work with an advisor to rebalance portfolios thrown out of kilter by the volatility and consider new opportunities. “We’re still in the early stages of understanding the full impact of the COVID-19 coronavirus on the economy and specific industries,” he adds. “Given that we expect volatility to remain in the near future, we also continue to emphasize diversification at the asset-class level and within asset classes.”

For more insights from our Chief Investment Office, read "Double Exogenous Shock: Short-Term and Long-Term Implications."

March 12, 2020

When Could the Markets Stabilize?

That’s the question top of mind for investors coming to terms with the extreme volatility they’ve experienced related to the spread of coronavirus and plunging oil prices. On Wednesday, the Dow Jones Industrial Average entered a bear market—or more than 20% down from its previous high—for the first time in 11 years1. While it’s impossible to predict what could eventually stabilize the markets, policy actions may be key, says Michael Hartnett, Chief Investment Strategist for BofA Global Research.

Partially driving the decline is the heightened uncertainty investors feel about the potential effects of coronavirus on the economy—and their own lives. It’s too early to know whether possible additional action by the Federal Reserve, beyond its March 3rd .5% interest rate cut, and various government proposals under consideration will help to jumpstart the economy and reassure investors. But such actions are positive signs, says Hartnett. They clearly indicate that policy makers are prepared to take dramatic steps.

“In order for the capital markets to stabilize, there needs to be a defined-policy response.” 

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

“With more data, including new policy responses, we should have a better understanding of the eventual economic and market impact,” notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

"The Three P’s"
While precise forecasts are impossible, Hartnett says investors can probably expect the current volatility to continue for at least another two weeks. In the meantime, Hartnett and other analysts will be closely watching the “Three P’s”—policy, positioning, and profits—for signs that markets are stabilizing. 

“Policy” includes any actions the federal government and central banks, such as the Federal Reserve, may take. “Positioning” refers to investors who sell stocks or other investments out of panic. At some point, those investors will have sold everything they can, and the selling will begin to ease, notes Hartnett. “Profits” marks the point at which investment markets have factored in their worst assumptions about corporate earnings. As recently as 2016 and 2018, says Hartnett, the Three P’s came together to signal the end of volatility.

Of course, every situation is unique, and this time market volatility is unfolding against the backdrop of a global pandemic. Still, “when you get to that point of bearish positioning and profit assumptions, and a big policy reaction may be put in place, you can get a big turnaround in the market,” Hartnett says. “In order for the capital markets to stabilize, there needs to be a defined policy response,” adds Hyzy.

“Remember to stay focused on your financial goals and the long-term strategies you’ve put in place to pursue them.” 

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

What can investors consider doing?
“Remember to stay focused on your financial goals and the long-term strategies you’ve put in place to pursue them,” says Hyzy. Looking out over the next several years, diversification will be key. “As the market volatility subsides, we would look for rebalancing opportunities, in accordance with your risk profile, in order to maintain diversification and possibly help to alleviate the effect of the declines investors have been experiencing.”

For more insights, read our Investment Insights report "Markets Trying to Price in the Worst-Case Scenarios."

March 10, 2020

Falling Oil Prices Add to Economic Concerns

So, what just happened?

THE DOW JONES INDUSTRIAL AVERAGE shed more than 2,000 points on Monday in its steepest one-day loss since 2008. The catalyst was a 30% drop in oil prices, stemming from a dispute between Russia and the Organization of Petroleum Exporting Countries (OPEC)—principally Saudi Arabia—over oil production. The stock slide came after markets had already been shaken by more than two weeks of volatility related to the global spread of coronavirus.

“The price war comes at the worst possible time, when oil demand is rapidly deteriorating as the virus spreads throughout the world,” says Francisco Blanch, head of Global Commodities and Derivatives Research, BofA Global Research. In response to this latest decline in stock prices, investors continued to flock to bonds, helping to drive interest rates down to just over .5% for 10-year Treasurys.

Saudi Arabia and OPEC have strong incentives to resolve their differences with Russia. We believe oil prices will begin recovering by next year, if not earlier.” 

Francisco Blanch, head of Global Commodities and Derivatives Research, BofA Global Research

Here’s our take on what this means.

BofA Global Research analysts recently lowered their outlook for oil prices for the year by 20%,1 and this could have important implications for the broader economy. “Our research has shown that higher oil prices generally have a positive effect on corporate earnings2. Therefore, lower oil prices could translate to lower average earnings growth than what we are currently projecting for companies in the S&P 500,” notes Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research.

The oil news, and the stock market sell-off that followed, dimmed hopes that the volatility that has defined markets for more than two weeks will stabilize any time soon, Subramanian says. Still, “Saudi Arabia and OPEC have strong incentives to resolve their differences with Russia,” Blanch notes. “A protracted price war is a very expensive thing for them. We believe oil prices will begin recovering by next year, if not earlier.” And falling oil prices could mean lower gas and energy prices for consumers, who could in turn spend more at places like retailers, supermarkets and drug stores—helping those areas of the economy, Subramanian says. In a broader sense, any positive developments on coronavirus, or signs that the spread is being contained, could lead to a better picture for U.S. earnings and markets in the second half of the year, she adds.

Typically the best days for markets follow the worst days, so panic selling is a path to underperformance.” 

Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research

What should investors consider doing right now?

While it’s natural to be unsettled by the market volatility, the best advice right now is to avoid making sudden investment decisions, Subramanian says. “Typically the best days for markets follow the worst days, so panic selling is a path to underperformance.” Over the long term, despite the volatility, the outlook for stocks remains favorable, she adds. Stocks of large, high-quality U.S. companies offering dividends may be attractive right now, especially given the low interest rates for bonds. But, notes Subramanian, “it’s always a good idea to talk with your financial advisor about what might make the most sense for your situation.” 

March 6, 2020

Helpful Perspective in Volatile Times

The sharp ups and downs of markets this week reflected ongoing uncertainty over the spread of coronavirus (Covid-19). At a time when economic concerns are fueled by still greater concerns over public health, “We need to stick to the facts and gain more insight into this outbreak’s severity and duration,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Each day brings new developments.”

“We need to stick to the facts and gain more insight into this outbreak’s severity and duration. Each day brings new developments.” 

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

In the absence of definitive news, markets often tend to assume the worst. “Equity markets seem to be pricing in negative earnings growth for S&P 500 companies for all of 2020,” Hyzy says. Yet while such worst-case scenarios are possible, U.S. economic fundamentals remain solid, he believes. If the virus is successfully contained, the economy in the second half of 2020 will likely resume the robust expansion that was underway before the outbreak occurred.

Where things stand now

The recent drops have been unsettling not just because of their magnitude but also their speed. “There were big swings down, then up, and down again on successive days, repeatedly,” having produced the fastest correction on record, says John Manetta, senior portfolio manager, Chief Investment Office, Merrill and Bank of America Private Bank. The Federal Reserve stepped in on March 3 with an emergency interest rate cut of .5% aimed at stimulating the economy.

But, notes Manetta, a look at recent history may help to put the volatility in perspective.  “During the downturn of 2015 and 2016, when oil collapsed, declines in S&P 500 earnings and gross domestic product were more severe than what we’re anticipating right now,” he says. More recently, the S&P 500 dropped 13% during the 4th quarter of 2018 and finished 4% down for the year—only to rebound with a 31% gain in 2019. While a worsening virus crisis could certainly change the outlook, “at this point things are serious, but not at the point that would trigger a recession,” believes Hyzy. 

A little historical perspective: The S&P 500 dropped 13% during the 4th quarter of 2018 and finished 4% down for the year—only to rebound with a 31% gain in 2019.

Stay diversified

Amid deepening concerns over stocks, “investors looking for less risky assets have flocked to bonds,” says Vineet Budhraja, Managing Director, Head of CIO Portfolios for the Chief Investment Office, Merrill and Bank of America Private Bank. The BofA Merrill Lynch U.S. Broad Market Index was up 3.8% by March 3, from January 17, according to the CIO. At the same time, because rising bond prices have come with record-low yields, they are important mainly for mitigating risk in a portfolio, Budhraja notes.

Despite the recent volatility, the CIO still expects stocks to likely outperform bonds in 2020, especially if economic growth resumes later in the year, and corporate earnings improve. Stocks of large, financially stable U.S. companies are especially attractive now, Hyzy says. “As the economy stabilizes, we expect sectors such as consumer discretionary, financials, industrials and technology to ultimately lead the market.” Yet the most important consideration during volatility is to stay diversified, he adds.

Look to the future

For the short term at least, we believe volatility is likely to remain a fact of life for investors, even as concern over the virus and illness are becoming a fact of life around the world. Both medically and economically, “Things may get worse before they get better,” Manetta says. But based on current information, he adds, there’s reason for long-term optimism about 2020 and beyond. 

March 2, 2020

What Coronavirus Could Mean for the Health of the U.S. and Global Economies

As coronavirus 2019 (COVID-19) concerns continue to mount, the definitive answers people want most are in frustratingly short supply. And while the immediate and overwhelming focus must be on the physical health of current and potential victims, events of the last week of February demonstrated what’s at stake for the health of the U.S. and global economies as well.

The S&P 500 lost 11% of its value, the fastest such drop on record and the worst week since the 2008 financial crisis. Ten-year Treasury yields stood at 1.16% and 30-year yields at 1.67%—both record lows. “An outbreak like this is very difficult to model, especially in the initial stages,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

As we await firmer answers, Hyzy, Michelle Meyer, head of U.S Economics for BofA Global Research, and Savita Subramanian, head of U.S. Equity & Quant Strategy and Global ESG Research for BofA Global Research, share their thoughts on what to look for in the markets next, and how investors can prepare. 

“China’s stock market has already bottomed out and rallied about 14%. Though that recovery remains volatile, we’ll be watching U.S. markets for signs of stabilization in the weeks to come.”

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

What are the biggest risks right now for the U.S. economy?
Meyer:
Looking at the economics of supply and demand, what we’ve seen so far is a supply shock. With Chinese suppliers disrupted, U.S. companies are worried about maintaining inventories and production. A supply shock alone would be painful but temporary. Companies would absorb the blow, find new suppliers and move on. The longer and more serious the crisis becomes, the greater the danger of a demand shock, where fearful consumers spend less, business confidence drops, and markets suffer even more. A demand shock could be much more problematic.

Hyzy: Coronavirus fears erupted at a time when leading indicators were quickly turning for the better. Amid strong consumer confidence, stock values and corporate profits were rising in unison, the Phase 1 U.S.-China trade deal had helped stabilize U.S. manufacturing, the housing market was robustly recovering, and global economies had bottomed out and were showing signs of improvement. A lot hinges on how quickly health authorities manage to treat and contain the virus.

How has the outlook for corporate earnings and U.S. and global GDP changed?
Subramanian: Before last week we were expecting U.S. corporate earnings to grow by 7% to 8% in 2020. Instead, we might be looking at lower single digits, and clearly the market is already anticipating lower earnings. We’re now expecting below-trend U.S. gross domestic product (GDP) growth of 1.6% for 2020, and our economic team recently lowered its global GDP forecast by 0.3% to 2.8%. That all sounds bad. But it’s important to note that if the virus is contained we could see a surge of pent-up demand for products and services. So while this is not going to be as good a year as we were expecting, we could very well see an earnings recovery in the second half.

What is the likelihood of a recession?
Meyer:
 Though the yield curve has inverted—meaning that interest rates for long-term government bonds have fallen below rates for short-term bonds--and is flashing a recessionary warning, the fundamentals of the U.S. economy remain strong. We put the chance of a recession at about one in three over the next year. Will we see one tomorrow? I don’t think so. But if this develops into a global pandemic, then a global recession is very likely. 

Hyzy: Last week’s steep drop indicates that markets are already reacting to that “what if?” scenario, versus what we believe is more likely—the virus will be contained. China’s stock market, which declined rapidly three weeks before the U.S. volatility of last week, has already bottomed out and rallied about 14%. Though that recovery remains volatile and in the early stages, we’ll be watching U.S. markets for signs of stabilization in the weeks to come. For historical perspective, there have been just 10 instances since 1948 when the S&P 500 has dropped 8% or more over six consecutive days. In each case, a year later stocks were up an average of 20% or higher. 

“The best days of market returns typically come after the worst days, and panic selling could cause you to miss out when markets recover.”

Savita Subramanian, head of U.S. Equity & Quant Strategy and Global ESG Research for BofA Global Research

How is the Federal Reserve likely to respond?
Meyer: We believe the Federal Reserve (Fed) will cut interest rates by 50 basis points at its March 18 meeting to help stimulate the economy. If conditions worsen, they could make emergency cuts before then. One thing they’ll be watching especially closely is the yield curve. When the yield curve goes negative, that’s often seen as a warning sign for recession. 

What can investors be doing?
Subramanian: When news comes quickly and markets respond erratically, the most important thing is to stay invested. The best days of market returns typically come after the worst days, and panic selling could cause you to miss out when markets recover. We looked at the data for a hypothetical investment going back to the 1930s. Left alone until today, that investment returned almost 15,000%. But when we omitted just the 10 best days for each decade, the return dropped to 91%.1

Hyzy: Investors should avoid trying to time the markets by anticipating short-term movements and focus instead on long-term goals and objectives. It’s especially important for investors to stay diversified and strategically rebalance their portfolios. 

For example, amid falling yields, bond prices have risen disproportionately high. In the coming weeks, investors may want to consider using some of those bond gains to rebalance with stocks of large, high-quality U.S. companies that have solid balance sheets and offer attractive dividends. One area to look at is utilities, which have little exposure to global supply chains. However unsettling the coronavirus situation becomes, don’t lose sight of long-term drivers of economic growth, such as innovation. We see opportunities in robotics, 5G technology, software and infrastructure, to name a few.

For more insights, read our latest Investment Insights: The Certainty of Uncertainty and the Effectiveness of Diversification

TOP