Investors nervous about volatility in the markets should remind themselves the market's fundamentals remain the same, Nilandri Mukherjee, director of portfolio strategy for the chief investment office of Merrill Lynch, told clients and prospects during a private lunch Thursday in Fort Worth.
U.S. markets typically experience a 5 percent pullback three times a year, and 10 percent at least once, Mukherjee told the group at the City Club. The markets had not experienced a 5 percent correction in 18 months or a 10 percent one in two years.
"It was too good to be true," Mukherjee said. But "the fundamentals have not changed."
Good for investors, blue chips "suddenly…were available at an attractive valuation," Mukherjee said. "This was a healthy pullback."
Merrill remains "bullish," he said. "The fundamentals are very, very good." Job growth, consumer confidence, and consumer spending are strong, and capital expenditures and business spending "are making a comeback."
Interest rates: "We do think interest rates will move higher. That will be stressful to your bond portfolios. We urge you not to sell your bond portfolios."
Global growth: "We expect 3 percent (GDP) growth in the U.S. in 2018 and 2 percent in Europe." Merrill also expects the best growth in emerging markets in five years.
CapEx growth: Projecting 8-9 percent U.S. growth in 2018, after 5 percent in 2017. "Companies have been piling up cash and doing (stock) buybacks. We're seeing companies do less buybacks and putting more money into CapEx."
Europe: "They're firing on all cylinders. The second biggest growth engine in the world is kicking into high gear. Germany traditionally drives growth. Now you're seeing growth come from Spain, Portugal, Ireland."
Other markets: Rising oil prices have benefitted Nigeria and Saudi Arabia. Russia's economy is growing, after a long recession. "We're extremely bullish on India. It's an economy which is consistently growing at about 7 percent. According to the IMF, it will be third largest economy in the world by 2028, behind the U.S. and China."
U.S. job growth projections: 3.5 percent, 2018, and 3 percent, 2019
Impact of U.S. tax law changes passed by Congress and signed into law by President Trump: Two tenths of a percentage point growth in 2018
Wage growth: Picking up as employers find it more difficult to hire skilled workers. "Companies are reporting they're just not able to find the people with the right staffs to hire. Companies are having to pay out for talent, finally. They're having to go out and hired lesser skilled Americans and train them up. We see 2.5-3 percent wage growth coming."
Inflation: "We don't expect inflation to spike any time soon. It's coming up."
Expect more market volatility as Federal Reserve pushes interest rates up: "They think the global economy can stand on its own two feet, and now they're trying to take the punch bowl away. We were spoiled for the last couple of years. Volatility has been so low."
U.S. economy's risk: "We're not blind to the fact that the U.S. economy has entered the late cycle." Once in late cycle, expansion can still continue for "a couple of years."
Possible trade confrontation between U.S. and China, as U.S. imposes tariffs on certain Chinese goods: "It's a really dangerous game to play. If China reacts and they put up barriers as well, that could lead to an instant recession for the U.S. and China. This is all a negotiated play to get China to the table and talk."
March 4 Italian election, with anti-Europe faction doing well in polls: "We're keeping an eye on that."
November U.S. election, with prospects of Democrats retaking one or both houses of Congress: "If that happens, we know nothing will get done in Washington for the next two years. That's obviously not a political statement. It's a fact. That's a risk worth keeping an eye on."
Alternative investment classes: Merrill recommending commodities, hedge funds, real estate and private equity. "That does mitigate volatility."
Investments likely to benefit from trends in next 12-18 months: CapEx comeback - Automated equipment, software, communications, networking equipment. Financial deregulation - U.S. banks, capital markets. Rising 'geopolitical complexity:' U.S. defense contractors. Housing's continued strength: Homebuilders, home renovation