The S&P 500 met bear market territory this past June, having lost more than 20% of its value from its high at the beginning of January. Tech and small-cap stocks in the Russell 2000 and Nasdaq indexes got an even worse mauling. Inflation has meanwhile ravaged energy and housing costs, and there are concerns the U.S. could be headed for a recession.
But even with these problems, there are anomalies: Job market wages and consumer spending remain strong, and there are new investment opportunities emerging.
That was the conclusion of Bank of America economists, who spoke on a webcast sponsored by Merrill and Bank of America earlier today. The webcast, hosted by Chris Hyzy, chief investment officer at Merrill and Bank of America Private Bank, was called “Midyear Outlook 2022: Turning Volatility Into Opportunity.”
Panelist Michael Gapen, head of U.S. economics at BofA Global Research, said the current business cycle doesn’t beg easy comparison to past business cycles, at least not any since World War II, when the economy had to transform itself from a military-industrial juggernaut to one that produced goods and services for returning GIs—a period which saw huge inflation as the U.S. tried to realign and rebalance supply and demand—when the supplies and demands were suddenly different. Those logistical disruptions, and the inflation they wrought, might seem familiar to us today.
“We’re having difficulty rebalancing supply and demand coming out of the pandemic,” Gapen said. So inflation “is likely to be with us for 18 to 24 months and then I think we will have settled in.”
He said, however, we are likely at the peak of that inflationary pressure, which stems from strong aggregate demand, supply chain turmoil and a spike in energy prices due to global unrest. Gapen says there’s some evidence that there’s some price reversal and decline coming in core goods.
The Fed’s willingness to jump in and fight inflation should also blunt demand somewhat, Gapen said.
Savita Subramanian, the head of U.S. equity strategy and quantitative strategy at BofA Global Research, said that the bank’s advice to investors from now until the end of the year is the same as it was at the beginning of the year. “Stick with total return. Stick with safe dividend yields. We’re past the point where price returns are going to drive your portfolio. You really want to think about income as a major contributor to your portfolio returns. Look for companies that are growing their dividends, that have healthy balance sheets, good visibility in terms of earnings and can pay you a dividend while you wait for the economy to improve a bit,” Subramanian said.
She said the firm’s favorite sectors are more defensive areas—healthcare and consumer staples, for example. “But we also like energy. We think [in energy and oil prices], there is going to continue to be demand. There’s going to continue to be inflation on the services side,” she said.
She noted that energy has doubled in size in the S&P 500 in the last 12 months. “Investors are possibly even more underweight the sector today than they were a couple of years ago. These are companies that are generating the highest free cash flow to price of all sectors in the S&P 500," she said. "They protect you against inflation on the commodity side but they also offer safe and stable income.”