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. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation (BofA Corp.). Investment products offered through MLPF&S: Are Not FDIC Insured Are Not Bank Guaranteed © 2014 Bank of America Corporation. All rights reserved. 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