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The Great Convergence: What’s Behind the Markets’ Optimistic Outlook?

May 29, 2020
How the recovery process could strengthen the U.S. economy

Aerial view of Outback mines in Australia

THOUGH THE INITIAL CORONAVIRUS SHOCK plunged markets, businesses and people’s lives into disarray, market performance since then seems to be discounting the effect.

The upward trend is a sign of underlying confidence that, once the deep economic uncertainties have been worked out, a stronger U.S. economy will emerge, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Right now, it’s a tale of two economies,” he adds. While some industries are rebounding or even growing, for others the future remains uncertain. “The Great Convergence,” a new Investment Insights report from the Chief Investment Office (CIO), describes how and when the recovery process could likely unfold and what portfolio strategy should be considered.

What’s behind the markets’ recent confidence?

Markets have been supporting an optimistic outlook in part because they have already written off the ravages of 2020 as a “pass-through year,” Hyzy says. Adding to their market confidence is unprecedented stimulus efforts by Congress and the Federal Reserve, with more potentially on the way. Amid signs that the U.S. economy, despite its challenges, appears better prepared for recovery than much of the rest of the world, “large institutional investors have transitioned from fear of being in the markets to fear of missing out,” he believes. And while the risks of market setbacks remain, they may increasingly view dips as an opportunity to add to their positions, rather than exit markets altogether.

Large institutional investors have transitioned from fear of being in the markets to fear of missing out.”

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

Expect not one but several recoveries
The overall economy is still in a transition phase to a recovery that could start in the third quarter and gain momentum in 2021. But it won’t be easy, or uniform. “As the country re-opens, we expect various types of recoveries to unfold,” Hyzy says. “While areas such as technology and healthcare seem poised for resilience and growth, challenged sectors such as airlines and automobiles will recover to differing degrees.” Assuming an end to the health crisis, a new, post-coronavirus economy will likely take shape starting in 2022, Hyzy believes—one that emphasizes technology, healthcare, e-learning, e-entertainment and local rather than global supply chains.

What can investors consider for the days ahead?

“With volatility likely to remain for the foreseeable future, investors may want to review their portfolios more frequently,” Hyzy says, adding that rebalancing and dollar cost averaging—which stretches asset purchases over time, thus potentially reducing the effects of volatility—can help them stay focused on underlying goals. When considering stocks, investors should favor the U.S. versus the rest of the world and large companies versus smaller ones for the foreseeable future, he believes. And at a time of extremely low interest rates, investment grade corporate bonds may offer better income potential (though with higher risks) than U.S. Treasuries.

For more insights on the markets and the economy, tune into the latest Private Bank CIO Audiocast .

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