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C IO REPORTS
Investment Insights
From the desk of Ashvin Chhabra, Chief Investment Officer, Merrill Lynch Wealth Management
A Turbulent Week
Most asset classes have fallen considerably
from their recent highs
Recent Peak-to-Trough Drawdowns
After a rough week, markets rallied strongly today. Equities in the
U.S. and Europe rebounded, and oil prices bounced back from
multi-year lows. After disappointing retail sales and producer prices
earlier in the week drew concerns that economic growth in the U.S.
was faltering, strong data in the past two days reassured investors
that the economy is improving.
n
Consumer confidence in the U.S. rose to the highest level in
released today rose to 86.4, above expectations. Clearly lower
gasoline prices and steady job creation have kept consumer
spirits high.
n
European
Equities
Emerging
Market
Equities Small Caps
S&P 500
-5%
High Yield
-3.2%
-7.3%
-12.2%
-15%
-11.6%
-10.9%
-19.2%
-22.7%
Source: Bloomberg, MLWM Investment Management & Guidance.
Data as of October 16, 2014. Measures: S&P 500 Energy sector, Euro Stoxx 50, MSCI
Emerging Markets, Russell 2000, Merrill Lynch High Yield Master index. Performance
measured by total return. Past performance is not indicative of future returns.
Structural issues in both Europe and Asia remain and will likely
continue to cause anxiety. We expect investors to keep a sharp eye
Housing starts climbed above an annualized rate of one million in
on these regions, and remain wary of any hint of a carryover to U.S.
September. A drop in mortgage rates should provide a boost to
economic activity. However, we maintain our base case of a slow
homebuyers and construction companies, enabling the industry
but steady recovery, with the U.S. remaining the engine of growth.
to remain a critical driver of the U.S. economy.
n
Energy
Stocks
-10%
-25%
seven years. The University of Michigan’s sentiment index
n
0%
Brent Crude
Oil
-20%
Developments:
OCTOBER 17, 2014
Expectations that monetary policy will remain accommodative
Key Takeaways:
Investors have been richly rewarded for riding the rally since the
have also helped raise investor sentiment. Comments from
lows of the Great Recession. The recent correction has been harsh,
regional Federal Reserve (Fed) President James Bullard yesterday
but within the context of the secular bull market, not out of line
sparked a rally in U.S. equities, which continued through today.
with historical standards. The S&P 500 has risen by more than
European equities and periphery sovereign bonds (such as
200% since 2009, and this marks only the third pullback of more
Italy, Spain and Greece) also rallied today on renewed hopes of
than 5% since 2012.
quantitative easing (QE) by the European Central Bank. There
Our advice remains to stay invested despite expectations of greater
are also increased expectations that policy makers in China and
volatility. For those fortunate enough to have been under-allocated to
Japan will take further stimulus measures to stem a slowdown in
the market, corrections such as these present a good entry point.
those countries.
BofAML Global Research sees opportunities in a few areas amid
We believe, however, that volatility has returned to the financial
this selloff. After taking a particularly bad beating, economically-
markets and we expect to see such periodic corrections especially
sensitive sectors such as Industrials and Technology should resume
as the Fed normalizes interest rates (see Exhibit).
their cyclical outperformance. Dividend growth stocks offer yield
The primary cause of concern has been disappointing data,
and can provide leverage to a growing economy. Small caps
primarily from Europe. Germany’s industrial production and export
have pulled back by more than 10% since August, narrowing the
numbers have come in below expectations, and Euro zone inflation
valuation gap with large caps. While large caps tend to do better
remains at dangerously low levels.
during market volatility, select higher-quality small caps have
become more attractive for investors with a greater risk tolerance.
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