Professional Documents
Culture Documents
CMO BofA 08-28-2023 Ada
CMO BofA 08-28-2023 Ada
CMO BofA 08-28-2023 Ada
All data, projections and opinions are as of the date of this report and subject to change.
Trust and fiduciary services are provided by Bank of America, N.A., Member FDIC and a wholly owned subsidiary of
Bank of America Corporation (“BofA Corp.”).
Investment products:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
Please see last page for important disclosure information. 5907102 8/2023
MACRO STRATEGY
Thoughts on a 5% World
Robert T. McGee, Managing Director and Head of CIO Macro Strategy
Investment Implications
For two decades prior to the pandemic, nominal GDP growth averaged about 4%—the
lowest rate since the 1930s. Since the early 1980s, a strong disinflation trend drove a Higher real and nominal yields in a
secular bull market in bonds, with each successive cyclical peak and valley in interest rates higher long-term inflation
lower than the one before. This culminated in the zero-rate world of the pandemic, environment would shift relative
frequent quantitative easing and the lowest long-term rates in history at the end of the valuations away from long-
long bond bull market. duration Growth stocks toward
shorter-duration Value stocks. We
The surge in inflation and rates since 2021 has broken this 40-year downtrend in both. are maintaining a balanced
The change in the Fed’s Statement of Longer-Run Goals and Monetary Policy Strategy approach with a neutral weight to
that was unanimously approved on August 27, 2020, set the stage for a new higher- Equities and a preference for high
inflation world where nominal growth is likely to rise from the prepandemic 4% pace quality across asset classes.
closer to 5%.
In the 4% world, inflation averaged a bit below 2% and real growth a bit more than that.
This historically low-trend growth and inflation raised the risk of deflation during cyclical
downturns in a highly leveraged U.S. economy vulnerable to 1930s-like debt-deflation
spirals and caused the fed funds rate to run up against the zero-bound, complicating
monetary policy and ushering in the addition of quantitative easing to the monetary policy
toolbox.
It was also associated with unusually low and negative real interest rates for extended
periods of time. This financial repression of normal market interest rate pressures to avoid
deflation encouraged excessive leverage and risk taking and drove up asset valuations to
historically high levels.
The August 2020 revisions to the Fed’s long-run goals states that, following periods when
inflation has been running persistently below 2%, over time, appropriate monetary policy
will likely aim to achieve inflation moderately above 2% for some time. Since this shift in
policy, inflation has been averaging closer to 4% than 2%. Over the past 75 years, inflation
has averaged closer to 3% than 2%. The 2% goal was abnormally low by modern
standards and created problems associated with the zero-effective bound. While the Fed is
not expected to update its longer-term goals until 2025, speculation is rampant that it will
eventually raise the target. For example, in an op-ed in the August 20 Wall Street Journal
Harvard Professor and former Chairman of the Council of Economic Advisors Jason Furman
makes the case for a higher target. Fed Chair Jay Powell has avoided the obvious point
that a true 2% target requires letting inflation run below that after extended periods when
it’s been above. He also stated at a recent press conference that the Fed would have to
ease before inflation falls below 2%. In short, he still seems committed to keeping
inflation above 2% despite the big overshoot since 2021.
Nominal GDP growth has been in a downtrend since the high-teens pandemic-policy peak
in 2021, reaching a new cycle low just below 5% at a seasonally adjusted annualized rate
during Q2. Most of the decline over the past year reflects falling inflation, as real growth
has actually picked up a bit this year. According to the latest Blue Chip Economic
Indicators, the August consensus forecast for nominal GDP growth in 2023 rose to 5.8%
from 5.5% in July. Since January, when it bottomed at 4%, the consensus forecast for
nominal growth this year has risen steadily, primarily because of upside surprises in real
Second quarter earnings reports illustrated the problem with such low nominal growth.
Corporate revenue growth is limited by nominal GDP growth; they have been falling
together since the pandemic spike. While Q2 earnings surprised to the upside, they were
still down on a year-over-year (YoY) basis. The persistent earnings recession that began
about a year ago reflects the squeeze that falling inflation is putting on corporate
revenues and margins as wages start to catch up with past inflation while exceeding
current lower inflation. Revenue growth for the S&P 500 fell below 1% on a YoY basis in
Q2, a new cycle low. Low revenue growth is squeezing free cash flow and forcing
companies to reduce buybacks that had been supporting stock prices. Lower earnings are
forcing cost cuts.
Unlike economists, bottoms-up analysts are anticipating a turnaround in revenue and profit
growth next year based on expected monetary easing.
That hope for rate cuts continues to get pushed further out into the future as the
economy keeps exceeding expectations. When a slowdown will justify lower rates remains
an open question at this point. The prospects for a 5% nominal growth trend going
forward suggests that a dip to the 3% or 3.5% nominal growth expected next year could
prompt a Fed pivot in the new higher inflation world. Generally, nominal GDP growth in a
3% to 7% range over the cycle would probably allow the Fed to operate without resorting
to zero rates and persistent quantitative easing in the future, like the environment that
prevailed before inflation was so low.
The low-inflation, low-interest rate world that prevailed before the pandemic shifted
investors’ preferences toward Growth stocks that benefit relatively from those conditions
at the expense of Value stocks. While the cyclical slowing of the current economy is
relatively beneficial for Growth stocks, the longer-term structural shift to higher rates and
inflation would favor Value stocks over long-duration Growth stocks. Higher nominal and
real rates are also likely to reduce excessive stretching for yield and the overleveraging
that’s more common in the zero-rate world of the past.
1
Bloomberg. August 25, 2023.
2%
0%
-2%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Bloomberg. Data as of August 24, 2023. Past performance does not guarantee future results.
2
Bloomberg. August 25, 2023.
The good news: These programs have triggered a wave of new factory construction
outlays in the U.S., which totaled $196 billion in June, up 80% from the same period a year
ago. The bad news: America’s muscular industrial policies have not gone unnoticed nor
uncontested around the world. The subsidies race between the U.S. and China has
triggered a global spirit with the European Union, Germany, France, Japan, Canada, the
United Kingdom and a handful of other nations offering their own subsidies and incentives
to attract capital investment.
All of that said, a key risk down the road is that the global subsidies race—spurred on by
national security concerns, not profits—ultimately leaves the world awash in
semiconductors, electrical batteries, solar panels and other subsidized goods. The resulting
bubble in global capacity would do nothing but create economic inefficiencies and hammer
the profit margins of numerous firms. Stay tuned.
35
30
25
20
15
10
5
0
08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Source: Global Trade Alert. Data as of August 9, 2023. Others include import bans, import quotas, etc.
Equities
Total Return in USD (%) Economic Forecasts (as of 8/25/2023)
Current WTD MTD YTD 2022A Q1 2023A Q2 2023A Q3 2023E Q4 2023E 2023E
DJIA 34,346.90 -0.4 -3.2 5.1 Real global GDP (% y/y annualized) 3.6 - - - - 3.0
NASDAQ 13,590.65 2.3 -5.2 30.6 Real U.S. GDP (% q/q annualized) 2.1 2.0 2.4 2.0 1.5 2.1
S&P 500 4,405.71 0.8 -3.9 16.0 CPI inflation (% y/y) 8.0 5.8 4.0 3.4 3.3 4.1
S&P 400 Mid Cap 2,579.20 0.0 -5.4 7.3 Core CPI inflation (% y/y) 6.1 5.6 5.2 4.3 3.8 4.7
Russell 2000 1,853.63 -0.3 -7.3 6.3 Unemployment rate (%) 3.6 3.5 3.5 3.7 3.8 3.6
MSCI World 2,911.99 0.5 -4.8 13.2 Fed funds rate, end period (%) 4.33 4.83 5.08 5.38 5.63 5.63
MSCI EAFE 2,053.48 -0.2 -6.4 7.9
MSCI Emerging Markets 971.04 0.7 -7.1 3.6 The forecasts in the table above are the base line view from BofA Global Research. The Global Wealth & Investment
Management (GWIM) Investment Strategy Committee (ISC) may make adjustments to this view over the course of the
Fixed Income† year and can express upside/downside to these forecasts. Historical data is sourced from Bloomberg, FactSet, and
Haver Analytics. There can be no assurance that the forecasts will be achieved. Economic or financial forecasts are
Total Return in USD (%)
inherently limited and should not be relied on as indicators of future investment performance.
Current WTD MTD YTD A = Actual. E/* = Estimate.
Corporate & Government 5.08 0.32 -1.48 0.62 Sources: BofA Global Research; GWIM ISC as of August 25, 2023.
Agencies 5.12 -0.01 -0.31 1.50
Municipals 3.84 -0.40 -1.81 1.21
U.S. Investment Grade Credit 5.13 0.28 -1.58 0.41 Asset Class Weightings (as of 8/8/2023) CIO Equity Sector Views
International 5.77 0.61 -1.78 1.72 CIO View CIO View
High Yield 8.65 0.42 -0.66 6.13 Asset Class Underweight Neutral Overweight Sector Underweight Neutral Overweight
90 Day Yield 5.46 5.43 5.40 4.34
neutral yellow
Equities
Overweight green
Healthcare
2 Year Yield 5.08 4.94 4.88 4.43
Slight overweight green
Energy
10 Year Yield 4.24 4.25 3.96 3.87 U.S. Mid Cap
Slight overweight green
Slight overweight green
International Developed Staples
Commodities & Currencies Emerging Markets
Neutral yellow
Total Return in USD (%) Neutral yellow
Technology
Fixed Income
Commodities Current WTD MTD YTD
U.S. Investment- slight overweight green
Communication Neutral yellow
Bloomberg Commodity 237.62 1.3 -1.4 -3.4
grade Taxable Services
WTI Crude $/Barrel†† 79.83 -1.7 -2.4 -0.5 International
neutral yellow
Industrials
Neutral yellow
Gold Spot $/Ounce†† 1,914.96 1.4 -2.6 5.0 Slight underweight orange
Financials
Total Return in USD (%) U.S. Investment Grade
slight underweight orange
Slight underweight orange
Materials
Prior Prior 2022 Tax Exempt slight underweight orange
Real Estate
Currencies Current Week End Month End Year End
EUR/USD 1.08 1.09 1.10 1.07 Alternative Investments* Consumer Underweight red
Discretionary
USD/JPY 146.44 145.39 142.29 131.12 Hedge Funds
USD/CNH 7.29 7.31 7.15 6.92 Private Equity
Real Estate
S&P Sector Returns Tangible Assets /
Commodities
Information Technology 2.6% Cash
Consumer Discretionary 1.1%
*Many products that pursue Alternative Investment strategies, specifically Private Equity and Hedge Funds, are available
Communication Services 1.0% only to qualified investors. CIO asset class views are relative to the CIO Strategic Asset Allocation (SAA) of a multi-asset
Real Estate 0.8% portfolio. Source: Chief Investment Office as of August 8, 2023. All sector and asset allocation recommendations must be
Industrials 0.3% considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all
Utilities 0.3% recommendations will be in the best interest of all investors.
Financials 0.1%
Materials 0.0%
Healthcare -0.1%
Consumer Staples -0.7%
Energy -1.4%
-2% -1% 0% 1% 2% 3%
Important Disclosures
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
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.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of
America, Merrill or any affiliate 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.
The Chief Investment Office (“CIO”) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions
oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
The Global Wealth & Investment Management Investment Strategy Committee (“GWIM ISC”) is responsible for developing and coordinating recommendations for short-term and long-term
investment strategy and market views encompassing markets, economic indicators, asset classes and other market-related projections affecting GWIM.
BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC and wholly owned subsidiary of
Bank of America Corporation.
All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all
investors.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
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. Stocks of small-cap and mid-cap companies pose special risks, including possible illiquidity and greater
price volatility than stocks of larger, more established companies. 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. Bonds
are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the
U.S. government. 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.
Alternative investments are speculative and involve a high degree of risk.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return
potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should
consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.
Nonfinancial assets, such as closely held businesses, real estate, fine art, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss
of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not in the best interest of all
investors. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax,
or estate planning strategy.
© 2023 Bank of America Corporation. All rights reserved.