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Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp. Investment products:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
Please see back page for important disclosure information.
April 2020The Great Separation
3060073 4/2020
Investment InsightsCHIEF INVESTMENT OFFICE
The opinions are those of the author(s) and subject to change.
AUTHORED BY:
Chris HyzyChief Investment Officer
Joseph QuinlanManaging Director and Head of CIO Market Strategy
Marci McGregorManaging Director, Investment Solutions
Lauren J. SanfilippoVice President and Market Strategy Analyst
Kirsten CabacunganInvestment Analyst
Data as of 4/27/2020 and subject to change.
As the journey out of the valley and over the bridge continues, the potential phases of recovery remain largely in focus (Exhibit 1). The double exogenous shock from the coronavirus and oil price war in Phase 1 led to historic market volatility and liquidity concerns. The Federal Reserve (Fed) responded by aggressively lowering its policy rate to zero, restarting quantitative easing (QE) and providing significant liquidity through various facilities to help ensure financial markets operated smoothly. Still the economy braced for a sharp downturn as containment efforts effectively shut down the economy, ushering in Phase 2, a bridge period, characterized by massive fiscal stimulus packages designed to cushion the fallout and provide relief in the face of social distancing. The unprecedented levels of liquidity injection and stimulus measures, and eventual progress on the health crisis, should help to ultimately present Phase 3, the economic recovery. On the other side of the bridge, this phase could see the economy slowly reopen and follow a U-shaped recovery, with a cautious consumer and a workforce reintroduced in
Exhibit 1: The Journey Along the Great Separation.
1
1
2
2
3
3
4
4
5
5
• Consumption strenthens• Economic data improves• Unemployment levels decline• Profit cycle climbs back to prior level• Equity markets revalued upward as
multiples expand and rates stay low
• Economy reopens• Testing, tracking, treatment ramp up• Volatility declines further• U-shaped recovery unfolds• Steady pace toward normalization
• Fiscal stimulus Coronavirus Aid, Relief, and Economic SecurityAct ("CARES Act")
• Synchronized global policy response• Equity markets bottom complete• Credit and liquidity trend to normal• Restrictions ease slowly by region
• Fixed Income Market Seizes
• Record Volatility• Equity Market Freefall
3/2020• Liquidity Crunch• Virus Freefall • Shutdown• Massive Policy Support• Liquidity Programs• Small Business
Lending Program
2/19/2020 S&P 500 3,386.15
Q3 2018–2019Tight Monetary Policy,
US-China Trade War
2011–2012U.S. Debt Downgrade,European Sovereign
Debt Crisis
3/09/2009S&P 500676.53
3/23/20S&P 5002,237.40
Q1 through Q3 2020 Q4 ’20Q1 ‘21
Q2 2021YE 2021
2010Greece
Debt Crisis
Q4 2015–Q1 2016Double Oil PriceCollapse
Global Financial Crisis (GFC) Market Bottom
• Coronavirus cases pick up globally• Social distancing begins• Volatile markets andliquidity concerns• Monetary policy response (cut rates
to zero, “unlimited” QE, liquidity facilities)
PHASE 1: LIQUIDITY
PHASE 1: LIQUIDITY
PHASE 2:THE BRIDGE
PHASE 3:ECONOMICRECOVERY
PHASE 4:PENT-UPDEMANDCYCLE
PHASE 5:THE NEWFRONTIER
PHASE 2: THE BRIDGE PHASE 3: ECONOMIC RECOVERY PHASE 4: PENT-UP DEMAND CYCLE
• Quality• Bio-Security• Brand Power• Innovation• Social Distancing• Health/Wellness• Personal Protection
• Expect equities to outperform fixed income• Emphasize Quality, Yield, Growth• Favor U.S. over the rest of the world• Stay disciplined with a goals-based plan• Maintain a diversified portfolio
• Telecommuting• Equity Culture Reborn• Environmental, Social and Governance (ESG)• Big Is Better• Artificial Intelligence (AI), 5G, the Cloud• Localization• e-Everything
PHASE 5: THE NEW FRONTIER
CIO PORTFOLIO STRATEGY OVERVIEW
2022
Source: Chief Investment Office as of April 27, 2020. Past performance is no guarantee of future results.
2 of 13 April 2020 – Investment Insights
stages. Eventually, Phase 4, or the pent-up demand cycle, should emerge as consumption strengthens and a more robust economy and profit cycle climbs back to previous levels. The recovery journey culminates in Phase 5, the new frontier, where new behaviors cement themselves into daily consumer and business life, supporting new industries and an acceleration in innovation. The charts that follow provide a visual roadmap through these phases.
PHASE 1: LIQUIDITY
Exhibit 2: A melt-up scenario was on track until the virus picked up globally.
2700
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3100
3200
3300
3400
0
500
1000
1500
2000
2500
3000
3500
4000
1/22 1/25 1/28 1/31 2/3 2/6 2/9 2/12 2/15 2/18 2/21 2/24 2/27
New Daily Coronavirus CasesTotal Number
S&P 500 IndexPrice LevelMainland China World excl. China S&P 500
New global cases surpass new cases within China
S&P 500 Peak
Source: World Health Organization. Data as of February 2020. February 17 data for mainland China new daily cases interpolated due to change in calculation methodology. Past performance is no guarantee of future results.
Exhibit 3: The coronavirus outbreak led to historic uncertainty.
0%20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
20%
40%
60%
80%
100%
2000
200
20
2
0
Total Return Monthly Volatiliy (LHS)
Oct ‘29: TheGreat Crash
Oct ‘87: “Black Monday”Oct ‘08: GFC
Feb ‘20: Coronavirus
S&P 500 total return (RHS)
Source: BofA Global Research. Data as of March 2020. Past performance is no guarantee of future results.
• Markets reacted slowly to the coronavirus outbreak in China as the S&P 500 continued to reach all-time highs, despite the rapidly rising number of cases.
• As coronavirus cases picked up globally, uncertainty over the magnitude and duration of the virus led to mass de-risking and highly sensitive markets to news headlines.
• Liquidity fears increased as long-term bond yields reached record lows and credit spreads widened out.
3 of 13 April 2020 – Investment Insights
Exhibit 4: Markets stop panicking once policymakers start panicking.
600
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1800
Sep-
07
Nov-
07
Jan-0
8
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov-
08
Jan-0
9
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov-
09
2007–2009 Global Financial CrisisS&P 500 Index Level
FOMC* first cuts rates to 4.75% from 5.25%
Stock Market Peaks
Treasury Creates $75b Superfund Fed cuts rates a fifth time to 3%
Economic Stimulus Act
Fed guarantees $30b of Bear Stearns' assets; Announces PDCF**, TSLF***.
FOMC cuts rates a 7th time (to 2%)
Housing & Economic Recovery Act
Fannie/Freddie nationalized; Lehman fails; AIG rescue; Fed announces AMLF****.
Congress Passes TARP*****; Fed announces Commercial Paper Funding Facility (CPFF).
Fed Announces QE and TALF******; Unemployment Compensation Extension Act
FOMC cuts rates to zero (10th and final rate cut during crisis); Auto bailouts begin
American Recovery and Reinvestment Act ($787b stimulus)
Stock Market Bottoms
Supplemental Appropriations Act
Fed announces US$ swaplines and term auction facility
* Federal Open Market Committee (FOMC). ** Primary Dealer Credit Facility (PDCF). *** Term Securities Lending Facility (TSLF). **** Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). ***** Troubled Asset Relief Program (TARP). ****** Term Asset-Backed Securities Loan Facility (TALF). Sources: Bloomberg; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
• Lessons from the Global Financial Crisis 2008/2009 reveal fragile markets look for an aggressive policy response before conditions improve.
• After some fits and starts, various policy measures over 2008/2009, and in subsequent years, helped cushion the negative economic impact of the financial crisis. Policy makers learned that bigger was better—in terms of both fiscal and monetary responses—which helped form a bottom in U.S. and global equities.
Exhibit 5: The Fed responded quickly and aggressively to the Coronavirus Panic.
0
1
2
3
4
5
6
7
8
9
10
0
500
1000
1500
2000
2500
3000
3500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Index Level $ Trillions S&P 500 Index (LHS) Federal Reserve Total Balance Sheet Assets (RHS)
Sources: Bloomberg; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
• Given the stress in the credit markets, the Fed responded by cutting interest rates to the effective zero lower bound (0–25 basis points (bps)), restored QE, and launched a series of emergency funding programs to keep markets functioning.
• The Fed’s balance sheet grew by trillions in the span of several weeks and is expected to continue to move higher in the coming months.
4 of 13 April 2020 – Investment Insights
PHASE 2: THE BRIDGE, OR ECONOMIC BUFFER
Exhibit 6: From record employment to record unemployment.
0
1000
2000
3000
4000
5000
6000
7000
8000
U.S. Initial Jobless ClaimsThousands
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Weekly jobless claims peakedat 665,000 in March 2009
Weekly jobless claims surged to ahigh of 6.9 million in March 2020Weekly jobless claims surged to ahigh of 6.9 million in March 2020
Sources: Bloomberg; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
Exhibit 7: Unprecedented monetary policy is met with the fiscal “bazooka.”
0
1
2
CARES Act
$ Trillion
Added Treasury Capital to backstop the Fed's lending Facilities
Loans for small business and nonprofitsIndustry support for airlines and other significantly affected sectorsAdditional tax relief measures
Recovery rebates to individuals
Expanded unemployment insurance
Appropriations for public services
Payments to states and territories
Individuals
Businesses
PublicServices
Sources: Cornerstone Marco Research; Chief Investment Office. March 2020.
Exhibit 8: The crisis has ushered in a synchronized global policy response.
Central Bank Liquidity Injection
Government Fiscal Stimulus
Central Bank Liquidity Injection and Government
Fiscal Stimulus
$ Trillion % GDP** $ Trillion % GDP $ Trillion % GDP
U.S. $4.80 22.4% $2.71 12.7% $7.51 35.0%
Eurozone $1.10 8.3% $1.43 10.7% $2.53 19.0%
Japan $0.20 3.9% $0.99 19.2% $1.19 23.1%
UK $0.25 9.0% $0.07 2.4% $0.31 11.4%
China $1.27 8.9% $0.54 3.8% $1.81 12.8%
Others* $0.65 $1.85 $2.50
Total $8.27 9.5% $7.59 8.8% $15.86 18.3%
* includes Rest of World and Asian Development Bank, International Monetary Fund, World Bank. ** Gross domestic product. Source: Cornerstone Macro. Data as of April 12, 2020. Past performance is no guarantee of future results.
• Weekly initial jobless claims surged to levels 10x the peak seen during the Global Financial Crisis.
• The government passed the “CARES Act”, a stimulus bill with a projected cost at over $2 trillion with the goal of providing relief to businesses, individuals and public services.
5 of 13 April 2020 – Investment Insights
Exhibit 9: Credit markets have started to trend back to normal.
0
1
2
3
4
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Investment Grade Option Adjusted Spread (OAS)Percent (%)
April 21: 2.14%
Sources: Bloomberg; Chief Investment Office. Data as of April 21, 2020. Past performance is no guarantee of future results.
Exhibit 10: A record fast decline to a record fast rally.
Duration (Trading Days)
5%0 10 20 30 40 50 60 70 80 90 100
10%
15%
20%
25%
30%
35%
Mag
nitu
de %
S&P 500 Bear Market Rallies (1950 to Present)
Sep. ‘01 to Jan. ’02
Nov. ‘08 to Jan. ’09
Average:+15%, 34 Trading Days
Current:30%, 15 Trading Days
Source: Strategas. Data as of April 17, 2020. Past performance is no guarantee of future results.
Exhibit 11: Equities still remain more attractive relative to fixed income.
8%
12%
16%
8%
4%
4%
0%
0%1957 1967 1977 1987 1997 2007 2017
1957 1967 1977 1987 1997 2007 2017
-4%
-8%
Earnings Price Yield (EP) for S&P 500 Minus Yield to Maturity (YTM) of 10-Year Treasuries
Spread
S&P 500 E/P
MedianS&P 500 E/P Minus 10-Yr. Treas. YTM
10-year Treasury YTMS&P 500 E/P
Source: Bhirud Associates. Data as of April 17, 2020. Past performance is no guarantee of future results.
• Since the liquidity injection by the Fed, investment grade spreads have started to narrow back to a normal range between 1-2%.
• Following the fastest move to a bear market in decades, equity markets bounced back just as fast, as investors look forward to the reopening of the economy supported by massive stimulus.
• In a low-yielding world, equities are expected to continue to outperform fixed income; preference: Quality (U.S. large cap), Yield (secure dividends) and Growth.
6 of 13 April 2020 – Investment Insights
PHASE 3: THE ECONOMIC RECOVERY
Exhibit 12: Virus containment could lead to a U-shaped recovery.
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
Trillions of U.S. Dollars(chained to 2012)
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21
Real GDP (Trillion USD$, Seasonally Adjusted Annual Rate) BofA Global Research forecast
Sources: BofA Global Research; Bureau of Economic Analysis. Data as April 2020. Past performance is no guarantee of future results.
Exhibit 13: China’s sharp rebound in manufacturing signals encouraging signs of economic recovery.
60
55
50
45
40
352007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
China Manufacturing Purchasing Managers’ Index (PMI)Index ( >50 = Expansion)
Sources: Bloomberg; China Federation of Logistics and Purchasing; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
Exhibit 14: After China’s peak in cases, some workers began to return to work.
0%% of employeesreturned to work
Resumption rate Utilization rate
10%
20%
30%
40%
50%
60%
70%
80%
90%Rate of Work Resumption as of February 20 State-Owned Enterprises Private
Note: For top 500 manufacturers. Sources: BofA Global Research; China Enterprise Confederation. Data as of March 2020. Past performance is no guarantee of future results.
• Progress on the health crisis could support a slow reopening of the economy, allowing workers to return to work and the economy to begin to resume.
• The large flush of liquidity into the system could help the recovery follow a U-shape, as uncertainty over the duration of the health crisis subsides and the focus shifts to a strong resumption in economic activity.
• According to modeling research estimates, the pandemic’s timeline has followed a similar pattern in each region. The rise in new cases tends to peak about six weeks after the outbreak begins and decline for about six weeks thereafter. Once new cases begin to decline, phased reopenings can likely begin. If this pattern continues, the path toward normalization and economic recovery seen in countries already “on the other side” could be potential examples for countries farther behind. China’s recovery could be a glimpse into what lies ahead for the rest of the world.
7 of 13 April 2020 – Investment Insights
Exhibit 15: A pickup in Chinese auto sales shows a strengthening consumer.
0
0.5
1
1.5
2
2.5
3
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
China Automobile Sales Passenger CarMillions
Auto Sales jumped 366% in Marchfrom the February trough
Sources: Bloomberg; China Federation of Logistics and Purchasing; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
Exhibit 16: Traffic volumes are steadily trending higher as China eases slowly back into their routines.
-200
150
300
450
600
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900
1,050Index
-10 10 20 30 40 50 60 70 80 90day
0
2020 2019Nationwide migration
Lunar New Year Ching Ming Festival
InternationalLabor Day
Ching Ming Festival
Sources: BofA Global Research; Baidu. Data as of April 19, 2020. Past performance is no guarantee of future results.
8 of 13 April 2020 – Investment Insights
PHASE 4: THE PENT-UP DEMAND CYCLE
Exhibit 17: Consumers cut back on spending across the board…
Bank of America Corporation (BofA Corp.) Monthly Aggregated Card Spending Growth by Major Sector for March% Month-over-Month % Year-over-Year(YoY) Prior 5-yr % YoY Average
Grocery stores 31.4% 32.0% 2.10%
General Merch* 3.9% 10.8% 4.40%
Home improvement 1.7% 5.5% 2.50%
Sporting goods -1.8% -5.7% -0.50%
Gasoline stations -19.5% -19.7% -2.20%
Furniture -23.8% -21.1% 0.70%
Home goods -29.0% -25.7% 1.80%
Restaurants -33.8% -31.1% 5.30%
Department stores -38.3% -41.9% -2.90%
Clothing -39.4% -42.2% 2.30%
Discount apparel -47.0% -46.5% 3.40%
Luxury -50.5% -47.8% 5.90%
Airlines -64.2% -67.6% 4.20%
Lodging -68.0% -67.4% 5.00%
Cruise -81.0% -83.5% 8.70%
* Includes Hobbies and Electronics. Sources: BofA Global Research; BofA Corp. internal data. Data as of March 31, 2020. Past performance is no guarantee of future results.
Exhibit 18: …But signs of stabilization have emerged.
0.601–Feb 11–Feb 21–Feb 02–Mar 12–Mar 22–Mar 01–Apr
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Daily total card spending (Indexed, January 1, 2020 = 1) 2020 2019
Sources: BofA Corp. internal data; Total card spending includes total BofA Corp. card activity which captures retail sales ex-autos +services that are paid with cards. Does not include ACH payments. Data as of March 2020. Past performance is no guarantee of future results.
Exhibit 19: Retail sales saw sharper declines compared to 2008/2009.
-10
-8
-6
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Adjusted Retail & Food Services Sales (Seasonally Adjusted)Total Monthy % Change
Sources: Bloomberg; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
• An improvement in spending could be a signal that a reopening of the economy could be met with strong pent-up demand on certain spending categories, especially given the fiscal cushion to individuals.
• The U.S. consumer appeared to be in better shape heading into the coronavirus outbreak compared to previous cycles. U.S. savings rates had been rising, reaching 8.2% in February, well above the average during the 2001–2007 business cycle at about 4.6%. Higher savings could be cushioning some consumers through this recession.
9 of 13 April 2020 – Investment Insights
Exhibit 20: Social distancing measures turned the lights off for many stores.
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Clothing Dining Out Autos NonstoreRetailers
GeneralMerchandise
Stores
GroceryStores
Total Monthly Change in Retail Sales
-51%
-27% -26%
3% 6%
27%
Sources: Bloomberg; U.S. Census Bureau; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
Exhibit 21: A strong recovery in growth relies heavily on the U.S. consumer.
U.S. Consumer
China GDP
Japan GDP
Germany GDP
U.S. Government
UK GDP
Italy GDP
Spain GDP
Share of Global GDP (2018)
0% 5% 10% 15% 20%
17%
16%
6%
5%
4%
3%
2%
2%
Sources: World Bank; Bureau of Economic Analysis. Data as of April 22, 2020. Past performance is no guarantee of future results.
PHASE 5: THE NEW FRONTIER
Exhibit 22: The shift from globalization to localization of supply chains should likely continue.
-40%06 07 08 09 10 11 12 13 14 15 16 17 18 19
-30%
-20%
-10%
0%
10%
20%
30%
40%
EM Asia manufacturing exports to the U.S. Year-on-year change Southeast Asia (Indonesia, Philippines, Vietnam, Malaysia, Thailand) China
Sources: Census Bureau, CEIC. Data as of July 2019. Past performance is no guarantee of future results.
• Retail sales confirm that consumers have shifted spending toward essential items. The decline in sales for clothing, restaurants and autos reflects the government imposed social distancing measures.
• The U.S. consumer represents 70% of U.S. GDP and a large share of the world’s GDP. If the pent-up demand story plays out, stronger consumption should help boost growth.
• Supply chains were already under pressure as trade tensions between the U.S. and China increased costs and forced companies to shift portions of production out of China.
10 of 13 April 2020 – Investment Insights
Exhibit 23: China maintains a firm hold on the supply of U.S. drugs.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%China's share as a % of U.S. imports of specified drugs
Ibuprofen Hydrocortisone Acetaminophen Penicillin Heparin All Antibiotics
95%91%
70%
45%40%
80%
Source: U.S. Commerce Department. Data as of 2020. Past performance is no guarantee of future results.
Exhibit 24: U.S. e-Commerce still has some room to grow.
10
11
12
13
14
15
16
17
2010 2011 2012 2013 2014 2015 2016 2017 2018
eCommerce as a % of total retail
Source: BofA Corp. internal data. Data as of 2019. Past performance is no guarantee of future results.
Exhibit 25: Trends in eSports reveal shifting consumption behaviors.
Occasional Viewers
eSports Audience Growth
eSports Enthusiasts
2018 2019 2020 2023E
395M
222M
173M 198M 223M295M
245M272M
351M
443MTOTAL AUDIENCE
+12.3%YOY
TOTAL AUDIENCE
+11.7%YOY
495M
TOTAL AUDIENCE
+10.4%CAGR 2019–2023
646M
Note: Due to rounding, Esports enthusiasts and occasional viewers do not always add up to the total audience. E=Estimate. Source: Newzoo. Data as of March 2020. Past performance is no guarantee of future results.
• The coronavirus shutdown has exposed how fragile global supply chains may be to disruption and the heightened risk involved in relying too heavily on one country for critical materials. Shifts in supply chains should likely accelerate from here.
• As the world heals from the coronavirus, a shift towards e-Everything should likely take hold. e-Commerce represents less than 16% of total U.S. retail spending and will likely increase as new online behaviors develop.
• The growth in eSports coincides with the next wave of consumers who grew up in a digitally connected, on-demand world and who prefers to consume online. Shifting trends will drive new areas of innovation virtually.
11 of 13 April 2020 – Investment Insights
Exhibit 26: Higher-ESG ranked equities have performed better during market declines, debunking the “bull market luxury” critique.
98
100
102
104
106
108
110
112
114
Performance of top quintile ESG-ranked equities (Sustainalytics) vs. the Equity weighted S&P 500 universe since Q4 2018Normalized to a factor of 100
Sep/18 Dec/18 Mar/19 Jun/19 Sep/19 Dec/19 Mar/20
Size-neutralSector-neutralQ1 (Sustainanalytics) vs. Equity Weight S&P 500Market sell-off > 15%
Note: Sector-neutral adheres to the sector weightings of the benchmark. Size-neutral removes market capitalization short term disclosure constraints. Sources: Sustainalytics, FactSet, BofA Global Research US Equity and Quant Strategy. Data as of March 25, 2020. Past performance is no guarantee of future results. Short-term performance shown to illustrate more recent trend.
Exhibit 27: Emerging Markets (EMs) drove much of the global growth seen in the last decade.
-42010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020* 2021*
-2
0
2
4
6
8Real GDP Growth (%, year-over-year)
WorldChina Advanced economies excl. U.S. Developing economies excl. ChinaUSA
* = Estimate. Source: BofA Global Research. Data as April 15, 2020. Past performance is no guarantee of future results.
Exhibit 28: Millennials have overtaken Baby Boomers, but Gen Z is not far behind.
0
10
20
30
40
50
60
70
80
90
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
Total PopulationMillions
Baby Boomer Millennial Gen Z
Millennials overtook baby boomers in 2018
Gen Z is expected to overtakebaby boomers by 2022and millennials by 2035
Sources: United Nations, Department of Economic and Social Affairs, Population Division 2019 Estimates; Chief Investment Office. Data as of April 2020. Past performance is no guarantee of future results.
• Given demographic trends and the relative outperformance of higher ESG-ranked equities during selloffs, sustainable and impact investing should come more in focus, especially as investors evaluate companies for their coronavirus response.
• EMs face challenges ahead including under developed healthcare systems and less fiscal flexibility, but some exposure may still be warranted given the rise of the EM consumer. Countries with competitive growth models will likely surge ahead.
• Strong demographic trends are shifting spending power into the hands of a more diverse and tech-savvy consumer, forcing companies to adapt or face disruption.
12 of 13 April 2020 – Investment Insights
Exhibit 29: Progress with millennial household formation remains gradual.
301982 ‘85 ‘90 ‘95 2000 ‘05 ‘10 ‘15 2019
40
50
60
70
80
90PercentAnnual Homeownership Rates for the United States by Age Group: 1982–2019
65 and over55–6445–54United States35–44
Under 35
Recession
Source: U.S. Census Bureau. Current Population Survey/Housing Vacancy Survey, March 10, 2020. Data as of March 2020. Past performance is no guarantee of future results.
Exhibit 30: An equity culture could soon be reborn.
20%
30%
40%
50%
60%
70%
Percentage of families with stockholdings by head of household age in years
1992 1995 1998 2001 2004 2007 2010 2013 2016
Less than 35 35–44 45–5455–64 65–74 75 or more
Sources: United States Federal Reserve (Survey of Consumer Finances). Deloitte Services LP economic analysis. Data as of 2018. Past performance is no guarantee of future results.
Exhibit 31: Spending on infrastructure has lagged since the Global Financial Crisis.
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
2.0%
2.1%
2.2%
2.3%
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
U.S. Public Construction Spending as % of GDP
Sources: Bloomberg; Chief Investment Office. Data as of April 22, 2020. Past performance is no guarantee of future results.
Where the path of recovery ends, the New Frontier begins, led by rapidly transforming business models, powerful demographic trends, a new spending cycle and an equity culture reborn.
• Pent-up demand in millennial homeownership could be unleashed as this cohort looks to start families and spending power rises. But the bulge in supply as baby boomers return stock to market, could create a mismatch in the market, as millennials look for more affordable housing given lower income levels, higher levels of debt and attractive interest rates.
• Households headed by those under 35 years old have been slower to increase stock holdings since the Global Financial Crisis relative to other age groups, but as rates remain low, higher equity allocations will be needed to produce returns.
• The increasing buildup of cash today, with money market fund assets under management reaching $4.5 trillion, now greater than the eurozone market capitalization, should help solidify a strong equity recovery once redeployed back into equities as uncertainty declines.
• Much needed infrastructure spending could induce a new capital expenditures (capex) cycle driven by major spending on software and technology as well as health care, strengthening productivity growth and supporting a new digital economy.
13 of 13 April 2020 – Investment Insights
Index DefinitionsS&P 500 Index: Stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States.
Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies.
Important DisclosuresThis material was prepared by the Chief Investment Office (CIO) and is not a publication of BofA Global Research. The views expressed are those of the CIO only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill or Bank of America entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation. The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.
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.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Companies may reduce or eliminate dividend payment to shareholders. Historically, dividends make up a large percentage of stocks’ total return.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
The economic and market forecasts presented are for informational purposes as of the date of this report. Economic or financial forecasts are inherently limited and should not be relied on as indicators of future investment performance.
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