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Mid-Year Outlook: Why We're Still Bullish on the Markets

A strong U.S. economy and projected above-trend global growth “should bode well for investors,” says Chief Investment Officer Chris Hyzy. Here, he points to potential risks and reasons for optimism.

2018 Mid-year Outlook: Why We’re Still Bullish on the Markets

With Chris Hyzy Chief Investment Officer, Bank of America Global Wealth & Investment Management

Please see important information at the end of this program. Taped on June 13, 2018

Following an usual period of calm in 2017, market volatility returned with a vengeance at the start of this year, prompting concerns that the second longest bull market in U.S. history could be coming to an end.

While we don’t see the volatility going away, in fact, it’s somewhat dormant right now. There are a number of reasons we’re optimistic that the bull run in equities, more specifically, U.S. Equities, still has room to go.

Number one is the strength of the U.S. economy, which is now the healthiest it’s been in more than a decade. Confidence among U.S. businesses is at record levels, especially small businesses which are the engine of domestic growth and that’s fueling spending on new investments, which leads to further growth, in our experience.

Consumer spending is also strong and getting a boost from last year’s tax cuts. Unemployment recently dipped below four percent, the number of job openings is higher than the number of unemployed and wages for many Americans are finally on the rise.

All of this is contributing to a solid outlook for U.S. corporate earnings, which should grow at a steady clip of around 17 to 18 percent or better through year end.

Despite some headwinds, especially in Europe, the global economy should see above trend growth this year.

We believe this backdrop of a healthy economy, a robust profit picture and more attractive valuations for stocks, should bode well for investors.

With that said, there are potential risks. In the short term, we’re closely watching the impact of slower European growth and pressure on the emerging markets from the stronger dollar, along with rising interest rates and higher oil prices.

A key medium term concern is a possible jump in inflation that would prompt the Federal Reserve to raise interest rates more aggressively than expected.

The midterm elections in the U.S. could bring a change in party leadership in Congress, adding to policy uncertainty, as well.

Elsewhere, we’re keeping a close eye on geopolitical risks; including the potential for trade wars and rising tensions between the U.S., Europe, and China. While we don’t foresee a full blown “transatlantic divorce” with Europe, even talk of an economic split could affect the markets on both sides of the Atlantic.

So how can investors navigate these risks and opportunities? We continue to believe that a well-diversified portfolio is the most effective way to do so across multiple asset classes.

Within equities, that means having a mix of high-quality investments spread across multiple sectors. We favor U.S. equities overall, both large and small cap, and prefer a balance between growth and value. We are neutral on international developed equity markets and still slightly positive on emerging markets.

In fixed income, we favor high-quality corporate bonds, along with some U.S. Treasuries and municipals. And as interest rates rise, consider adding bonds with shorter maturities, as they are less sensitive to rate increases.

Again, we believe stocks should continue their current bull run into 2019.

We continue to stress that periods of volatility and market pullbacks represent buying opportunities in our favored areas.

And investors who stay the course and maintain a long-term perspective should be best positioned to capture new growth opportunities as they emerge.  Thank you.

IMPORTANT INFORMATION

Information as of 6/13/2018 and subject to change.

Investing involves risk, including possible loss of principal. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy.

Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks. 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.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

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