(August 15 – 14:30 ET) – Merrill Lynch remains cautious, but bullish, on U.S. markets.

The firm’s latest asset allocation weightings indicate a defensively optimistic tone. It recommends that balanced accounts hold 55% in equities, 30% bonds, and 15% cash. Its “moderately aggressive asset allocation” is 90% equities and 10% cash, with 5% of the cash considered “frictional: cash, in other words money on hand to absorb trading costs.

“We would consider raising the equity portion [of the balanced portfolio] by drawing down cash reserves if the “Goldilocks” economy avoids either an over shoot or an under shoot in coming months,” Merrill says, noting that its equity allocation is under the 64% recommended by most sell-side firms.

Merrill is expecting a neutral to favourable interest rate environment from here on in, with the Fed on hold to November at least. “There have been only a few environments in which a fully defensive posture in equities versus bonds or cash has been appropriate both from a risk/return perspective and also profitable. Those environments are usually defined by rapidly rising interest rates.” Merrill doesn’t believe these conditions will emerge, nor does it see a boom due to falling rates.
-IE Staff