Coronavirus Update: COVID-19 and the Markets

Coronavirus update: COVID-19 and the markets

March 20, 2020

Michael Cembalest

INVESTMENT AND INSURANCE PRODUCTS ARE: •NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY •NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES •SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED Where can I find all these charts and what they mean

Private Bank www.jpmorgan.com/coronavirus-research

Asset Management www.jpmorgan.com/coronavirusupdates

1 Infection counts

Coronavirus T days after respective region's outbreak Cumulative number of cases 140,000

120,000

100,000 China 80,000

60,000 World 40,000 ex-China

20,000

T9 T0 T3 T6

T30 T51 T12 T15 T18 T21 T24 T27 T33 T36 T39 T42 T45 T48 T54 Source: JHU. March 18, 2020. T0: China = Jan 22, Outside China = Feb 4.

2 East vs West: cultural differences; SARS impact on behaviors; ability of federal and local governments to monitor and enforce population movement restrictions; testing capabilities, etc

Infections per 1 million people by region 200 Hubei (China) 180 Europe 160 Dev Asia (Sing, HK, SKor, Jpn, Tai) 140 Can-US 120 China ex Hubei 100 80 60 40 20 0 Jan 22 Feb 01 Feb 11 Feb 21 Mar 02 Mar 12 Source: Johns Hopkins University, IMF, JPMAM. March 18, 2020.

3 The example of Taiwan

• QR code scanning and online reporting of each person’s travel history • Health symptoms were used to classify traveler infectious risks based on flight origin and travel history in the past 14 days • People with low risk were sent a health declaration border pass via SMS to their phones for faster immigration clearance • Those with higher risk were quarantined at home and tracked through their mobile phone to ensure that they remained there during the incubation period • Taiwan also proactively seeks out patients with severe respiratory symptoms (based on information from a national health database) to see who had tested negative for influenza so that they could be retested for COVID-19

4 Infection rates

Reported infections per 1 million people for countries with over 100 reported cases for at least the last 5 days Hubei 600 Italy Italy Switzerland 550 Spain Norway Iran 500 Austria Denmark 450 South Korea Germany 400 France Switzerland Belgium Sweden 350 Netherlands Spain Finland 300 Ireland Norway Singapore Israel 250 Iran Portugal DenmarkAustria Greece 200 South Korea U.K. France Malaysia 150 Hong Kong Germany U.S. Sweden Australia 100 Finland Canada Romania 50 Singapore China ex Hubei Japan Japan U.S. Poland 0 Saudi Arabia 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Iraq Egypt # of days after total reported cases reaches 100 Philippines Source: Johns Hopkins University, IMF, J.P. Morgan Asset Management. March 18, 2020. Brazil India

5 Reported infections as a function of latitude: for now, the one third of the world’s population below 22.5°N has not experienced meaningfully high levels of infection

Global reported infections by latitude 0 4,000 8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000 40,000 72.5° Greenland 67.5° Finland, Sweden, Iceland 95% of all infections in a latitude 62.5° Norway, Alaska Estonia, Russia band encompassing 55% of the 57.5° UK, Denmark Ireland, Quebec, Saskatchewan, Belarus 52.5° Germany, Belgium, Netherlands, Poland, Ontario world’s population BrColumbia, Ukraine, N Dakota, Slovakia, Heilongjiang 47.5° Croatia, Switzerland, Romania, Washington, Minnesota, France Italy, Oregon, Wisconsin, Michigan, Jilin 42.5° NY, Massachusetts, Illinois, Pennsylvania, Ohio, Beijing, Xinjiang Spain, Greece, Colorado, Portugal, Virginia, Maryland, Hebei, Shanxi, Tianjin, Turkey Infections and world population as a function of latitude 37.5° Japan, California, Oklahoma, N. Carolina, S.Korea, Shandong, Qinghai 45% Arizona, Arkansas, Mississippi, Iraq, Afghanistan, Henan, Jiangsu 32.5° Pakistan, Texas, Louisiana, Iran, Hubei, Anhui, Shanghai, Tibet 89k 40% Nepal, Algeria, Florida, Hunan, Jiangxi 27.5° Egypt, Qatar, Fujian 35% UAE, Mexico, Saudi Arabia, Bangladesh, Guangdong, Guangxi, Taiwan 22.5° India, Hong Kong, Macau, Cuba, Oman 30% Dominican Republic, Hainan, Jamaica 25% 17.5° Vietnam, Honduras Thailand, Philippines, Sudan, Senegal 20% 12.5° Cambodia, Burkina Faso, Trinidad % of infections Nigeria, Costa Rica, Panama, Ethiopia 15% 7.5° Sri Lanka, Venezuela % of world population Cameroon, Colombia, Maldives, Guyana, Brunei 10% 2.5° Singapore, Malaysia 5% Everything below 2.5 N: Argentina, Australia, Bolivia, Brazil, Chile, Congo, Ecuador, Indonesia, Kenya, New Zealand, Paraguay, S Africa 0% 72.5° 62.5° 52.5° 42.5° 32.5° 22.5° 12.5° 2.5° -7.5° -17.5° -27.5° -37.5° -47.5° Source: Johns Hopkins, JPMAM. March 18, 2020 Source: Johns Hopkins University, NASA, JPMAM. March 17, 2020.

6 Infections as a function of temperature and humidity: 90% still in the blue zone

Infections as a function of prevailing temperature and relative humidity Relative humidity (percent) Below 5 to 20 to 35 to 50 to 65 to 80 to 5 20 35 50 65 80 95 Below -10 - - 1 - - 232 - -10 to -5 - 125 246 1,123 470 234 - -5 to 0 - 2,601 8,466 1,142 1,280 3,302 899 0 to 5 58 1,749 2,858 444 1,212 4,024 25 5 to 10 - 2,705 53,944 19,232 4,950 448 173 10 to 15 - - 9,550 81,748 2,102 164 - 15 to 20 - 279 452 1,817 106 536 65 20 to 25 269 196 202 991 1,016 1,171 - 25 to 30 76 - 11 30 - - -

Temperature (Celsius) Temperature 30 to 35 61 11 6 - - - - 35 to 40 ------

Source: WHO, Johns Hopkins, OpenWeatherMapAPI, JPMAM, March 18, 2020

7 What we have learned about the virus

• Up to 85% of infections occur in family clusters • Most of the remainder occurred due to contact with hard surfaces in the immediate environment of those with infection • Limited instances of hospital-borne infection • Although asymptomatic patients were reported for SARS, no known transmission occurred from these patients • Basic reproductive number (a measure of transmissibility): similar to SARS • Incubation time (how long it takes to show symptoms): similar to SARS • Serial interval (how long it takes to become infectious to others): different, and that’s the root of the problem • Average symptoms show up on Day 5, contagiousness can begin on Day 4

8 COVID-19 (SARS-CoV-2) and surfaces: rapid time-decay of viral load

Decay of SARS-CoV-2 on Copper Decay of SARS-CoV-2 on Cardboard Viral load measure, TCID per ml of medium 50 Viral load measure, TCID50 per ml of medium 10,000 10,000

1,000 1,000

100 99% dissipation in 8 hrs 100 97% dissipation in 8 hrs

10 10

1 0 10 20 30 40 50 60 70 80 1 0 10 20 30 40 50 60 70 80 Hours Hours Decay of SARS-CoV-2 on Stainless Steel Decay of SARS-CoV-2 on Plastic Viral load measure, TCID per ml of medium Viral load measure, TCID50 per ml of medium 50 10,000 10,000 45% dissipation in 24 hrs

1,000 1,000 97% dissipation in 24 hrs 98% dissipation in 48 hrs 100 100 99.8% dissipation in 48 hrs 10 10

1 1 0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70 80 Hours Hours

Source: van Doremalen et al, “Aerosol and Surface Stability of SARS-CoV-2 as Compared with SARS-CoV-1”, National Institute of Allergy and Infectious Diseases. 2020.

9 Some promising news in development of anti-viral medications

Remdesivir tests against 2019-nCoV in cell cultures Chloroquine tests against 2019-nCoV in cell cultures % virus inhibition % cytoxicity % virus inhibition % cytoxicity 120% 120% 120% 120% 100% 100% 100% 100% 80% Inhibition 80% 80% 80% 60% 60% 60% 60% Inhibition 40% 40% 40% 40% 20% 20% 20% 20% Cytoxicity 0% 0% 0% 0% -20% -20% -20% -20% Cytoxicity -40% -40% -40% -40% 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Dosage (micrometers) Dosage (micrometers) Source: Wuhan Institute of Virology. February 4, 2020. Source: Wuhan Institute of Virology. February 4, 2020.

10 Some promising news in development of anti-viral medications Treatment results of patients with COVID-19 % of patients that test positive for infection 100% 90% 80% 70% Control group 60% 50% 40% Hydroxychloroquine only 30% Hydroxychloroquine 20% and azithromycin 10% combination 0% 0 1 2 3 4 5 6 Days Source: Gautret et al, IHU-Méditerranée Infection. March 2020.

11 Drug development underway: vaccines, direct viral inhibitors and immunomodulators

Drug Companies Status Type Drug Companies Status Type Drug Companies Status Type

Beijing Advaccine Beijing Dingcheng Fujifilm; Medivector; Zhejiang Dendritic cell Favipiravir Launched Antiviral INO-4800 Biotech; GeneOne Life Preclinical Vaccine Taiyuan Biotechn; Discovery Vaccine Hisun Pharmaceutical vaccine Science; Inovio Betta Pharma Immuno- Celularity; Sorrento Recombinant Clover Actemra Genentech/Roche Launched CYNK-001 Preclinical Cell Therapy Discovery Vaccine modulator Therapeutics vaccine Biopharmaceuticals Chongqing Zhifei Aim Immunotech; GP Pharm Immuno- SARS-CoV-2 Live-attenuated Codagenix; Serum Rintatolimod Launched Biological; Institute of Preclinical Vaccine Discovery Vaccine SA; Goethe University modulator vaccine vaccine Institute of India Microbiology Adjuvant/COVID- SARS-CoV-2 ASC-09 + ritonavir Ascletis Pharma Phase III Anti-retroviral Novavax Preclinical Vaccine Curevac AG Discovery Vaccine 19 vaccine mRNA vaccine Dyadic International; Sichuan Kelun Prophylactic Monoclonal Antibody/ Remdesivir Gilead Phase III Antiviral S-protein/ACE2 Preclinical Israel Institute for Discovery Pharmaceutical polypeptide antibodies/vaccine Vaccine Biological Res Immuno- ChAdOx1 nCoV- SARS-CoV-2 Fudan University; ID Kevzara Regeneron/Sanofi Phase III/II Jenner Institute Preclinical Vaccine Discovery Vaccine modulator 19 vaccine Pharma Mesenchymal Wuhan Hamilton Guanhao Biotech; Zy BDB-1 Beijing Defengrei Biotechnology Phase II Antibody Preclinical Cell Therapy Z-VacciRNA Discovery Vaccine stem cells Biotechnology Therapeutics Brilacidin Innovation Pharmaceuticals Phase II Antibody

Protein subunit Regeneron SARS-CoV-2 Medigen' National University of Queensland Discovery Vaccine Antibodies Discovery Antibody Discovery Vaccine vaccine Pharmaceuticals vaccine Institutes of Health Monoclonal Protein subunit Vir Biotechnology Discovery Antibody Sanofi Pasteur Discovery Vaccine mRNA-1273 Moderna Therapeutics Discovery Vaccine antibodies vaccine Anti-SARS-CoV-2 Coronavirus Immunoprecise Nanoviricides Discovery Nanoviricide Vaxart Discovery Vaccine Antibodies Discovery Antibody program vaccine Antibodies Source: Cortellis, Bioworld, Johns Hopkins, JPMAM. As of March 5, 2020.

12 China equity markets and infections

Chinese daily infections versus Chinese equities Daily number of cases Index level 1,000 3300 China 900 excluding Hubei 800 3200 700 600 3100 500 400 3000 300 Shanghai Stock Exchange A Share 200 2900 Index 100 0 2800 Jan 23 Jan 31 Feb 08 Feb 16 Feb 24 Mar 03 Mar 11 Mar 19 Source: Bloomberg, Johns Hopkins University. March 18, 2020.

13 A key litmus test for the world: what will happen to infection rates in China as lockdown provisions and quarantine provisions are relaxed? Risks of a “second wave” of infections

High frequency Chinese economic indicators Chinese daily infections: Hubei vs ex-Hubei Indicated level as a % of historical average Daily number of cases 4,000 100% 20 days after Chinese New Year (2/14) Most recent level 3,500 80% Hubei

3/14 3,000

2/25 3/17

60% 3/17

3/17 2,500

40% 2,000

2/18 3/12 20% 1,500

3/11 1,000 0% Railway Electricity Traffic Coal Home Road Transport Box 500 China ex- coal use jams consum. sales and rail hub office 0 Hubei deliveries /factory travel passeng. revenues Jan 23 Jan 31 Feb 08 Feb 16 Feb 24 Mar 03 Mar 11 Mar 19 capacity flows Source: J.P. Morgan Emerging Markets Research, Goldman Sachs. Mar 18, '20. Source: Bloomberg, Johns Hopkins University. March 18, 2020.

14 One possible scenario for the US

Best guess epidemiology outcomes for the US James Lawler, MD, MPH, FIDSA, University of Nebraska Region VII disaster health response ecosystem webinar Reproductive number 2.5 Doubling time 7-10 days Community attack rate 30-40% Cases 96 million Hospital admissions 4.8 million (5%) Cases requiring ICU care 1.9 million (1-2%) Cases requiring ventilatory support 1% Deaths 480,000 (0.5%) Source: Region VII Disaster Health Response Ecosystem. Feb 27, 2020.

15 Where “flattening the curve” comes from

Great Britain critical care beds occupied per 100,000 of population 300 Do Nothing

250 Closing schools and universities Case isolation 200 Case isolation and household quarantine

150 Case isolation, home quarantine, social distancing of >70s

100

50 Surge critical care bed capacity 0 Mar '20 Apr '20 May '20 Jun '20 Jul '20 Aug '20 Sep '20 Oct '20 Source: "Impact of non-pharmaceutical interventions (NPIs) to reduce COVID19 mortality and healthcare demand", N Ferguson et al, Imperial College of London, March 2020.

16 Mortality as a % of reported infections

Mortality rates: COVID-19 vs other diseases, and the impact of Wuhan/Hubei Mortality rate; bubble size indicates relative number of fatalities for COVID-19 only Pandemic measures: 8.5% Italy, 8.3% (a) population of a given geographical area 8.0% COVID-19 (b) infected individuals, including both asymptomatic 7.5% Other diseases people and people that get sick 7.0% (c) people that are infected, get sick and self-report 6.5% Iran, 6.5% (d) number of people that die

6.0%

5.5% During the haze of a pandemic, best estimates that entities like the World Health Organization often derive 5.0% Wuhan, 5.0% Yellow Fever, 4.9% 4.5% Hubei, 4.6% Spain, 4.5% are based on (a), (c) and (d), and even things like (d) are West Nile Virus (2013), 4.2% complicated by pandemics affecting older individuals 4.0% China, 4.0% World ex China, 4.1% with pre-existing conditions. They do not know (b) 3.5% Spanish flu (1918-1920), 3.5% Cholera (2010), 3.2% upfront, and sometimes it is never known, or only known 3.0% Netherlands, 2.8% with the passage of time. Swine Flu (H1N1/2009) 2.5% United Kingdom, 2.7% example. Early mortality rate estimates in fall 2009: 2.0% Beijing, 1.7% Henan, 1.7% France, 1.6% 1.0%-1.3%. Four years later: just 0.02%. 1.5% United States, 1.5% Chongqing, 1.0% Switzerland, 0.9% Swine Flu (2009/Initial), 1.3% 1.0% China ex-Hubei, 0.9% South Korea, 1.0% Shanghai, 0.8% Diamond Princess, 1.0% US Flu, 2019, Age 65+, 0.8% GIMBE Foundation: Italy infections likely ~100,000, Guangdong, 0.6% Measles, 0.7% Anhui, 0.6% Belgium, 0.9% 0.5% Norway, 0.4% Hepatitis A, 0.5% Hunan, 0.4% Austria, 0.2% Swine Flu (2009/Revised), 0.0% which would reduce observed mortality rate to 2% 0.0% Jiangxi, 0.1% Germany, 0.2% US Flu, 2019, 0.1% China Rest of World Lyme disease, Chicken Pox, 0.0% Mortality rates shown for all countries with at least 1,000 infections to date. Sources: CDC, China National Health Commission, Center for Diamond Princess cruise ship: ability to observe both Health Protection (HK), Global Health Data Exchange, Johns Hopkins University, Netherlands Institute for Health Services Research, Imperial College of London, Mayo Clinic, World Health Organization, JPMAM. March 18, 2020. symptomatic and asymptomatic individuals

17 Infection and mortality rates

Coronavirus mortality rate by age Coronavirus mortality rate based on pre-existing conditions 16% 12% 14% 10% 12%

10% 8% Current mortality rate 8% 6% 6% Current mortality rate (3/18/2020) 4%

4% conditionsexisting -

2% 2%

Study mortality rate (2/17/2020)

Chronic respiratory diseaserespiratory Chronic pre No

Cardiovascular diseaseCardiovascular

Hypertension Cancer 0% Diabetes 0% 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+ Source: Chinese CDC, WHO. February 2020. Source: Chinese Center for Disease Control and Prevention. February 2020.

18 Infection and mortality rates

Distribution of COVID-19 mortality and infections by age Case fatality rate during and after the Spanish flu % of total infected or deceased population Fatalities per 100 infected persons 35% Mortality 6 Influenza fatality rate during the Spanish flu (1918-19) 30% 5 Influenza fatality rate after the Spanish flu (1928-29) 25% Infections 4 20% 3 15% 2 10% 1 5% 0 0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+ Age Source: Chinese Center for Disease Control and Prevention. February 2020. Source: Taubenberger and Morens. 2006.

In Italy, mortality distribution even more skewed to the elderly: 88% of deaths occurred in population 70+, compared to 50% in China

19 Lessons learned 100 years ago, ignored in China

Excess pneumonia & influenza mortality in 43 US cities, • 100 years of history: get ahead of a pandemic 1918-1919, Excess deaths per 100,000 population 800 • Jan 1: Chinese officials required hospitals not to transfer fever patients to another medical facility, 700 prevented doctors from publishing diagnosis and 600 treatment information for COVID-19 500 • Jan 1: Chinese government punished doctors for

400 discussing outbreak, required them to sign documents saying they were spreading lies 300 Public health response • Jan 14: Wuhan Health Commission reported that time (days) 200 there were no new coronavirus cases, and that risk -15 -10 -5 0 5 10 15 20 25 30 35 of human-to-human transmission is low Source: Markel et al, University of Michigan. 2007. • During first three weeks of Jan, Wuhan hospitals Faster public health response times = didn’t treat infected or asymptomatic outpatients as lower mortality rates potentially infectious • 40 infectious patients visiting clinics on Dec 31 ended up exposing 18,000 people before city shut down on Jan 23

20 Beds and testing

Hospital beds vs number of 2019-nCoV infections COVID-19 tests per million people Hospital beds per 1,000 people 6,000 14 JPN 12 5,000 KOR 10

AUT 4,000 24 DEU -

8 17

BEL 17

- 13 3,000 17

NLD - 17

FRA -

- -

6 - 17

SWI 17

17 -

17 17

16 17 08

16 09

NOR -

- -

- - -

17 -

4 2,000 -

- 13

CAN ITA -

17 - - USA ESP Feb Guangdong 2 – SGP GBR IRN 1,000 SWE

0 MAL

South Korea Mar Korea South China China Mar Kingdom United Mar Republic Czech Mar Netherlands Mar States United Mar Zealand New

Denmark Mar Denmark Mar Poland Mar Japan Norway Mar Norway Mar Australia Mar Austria Mar Canada Mar Russia Mar Taiwan Mar Switzerland Mar Ireland Mar Croatia Mar France Mar Finland Mar Thailand Mar Vietnam Mar Africa South

Italy Mar Italy Mar Israel Mar India 0 5,000 10,000 15,000 20,000 25,000 0 Number of infections Source: WHO, World Bank. March 16, 2020. Source: Countries statistical reports by Esteban Ortiz-Ospina, IMF. Mar 17, '20

21 Equity markets

S&P 500 multiple derating S&P 500 price/earnings Forward 12 month P/E, difference versus previous month Price / forward 12 month earnings per share 26x 0.0x -0.5x 24x -1.0x -1.5x 22x -2.0x 20x -2.5x -3.0x 18x -3.5x 16x -4.0x -4.5x 14x -5.0x 12x -5.5x -6.0x 10x 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Source: JPMAM. IBES, Datastream, Bloomberg. March 18, 2020. Source: JPMAM. IBES, Datastream, Bloomberg. March 18, 2020.

22 Equity markets

S&P 100 implied volatility index Index level 100 90 80 3/18/2020 level 70 60 50 40 30 20 10 0 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Source: Bloomberg. March 18, 2020.

23 Equity markets

Positions in US equity futures by leveraged funds and Quantity-On-Loan of the SPY US ETF asset managers, Spec positions as a percentage of open interest On loan quantity as a % share of share outstanding 30% 7% 25% 6% 20% 15% 5%

10% 4% 5% 0% 3% -5% 2% -10% Extrapolated to March 17th 1% -15% using open interest changes -20% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Source: JPM Global Markets Strategy Flows & Liquidity. March 17, 2020. Source: JPM Global Markets Strategy Flows & Liquidity. March 16, 2020.

24 Credit markets

US high yield corporate bond spreads US investment grade corporate bond spreads Emerging market sovereign bond spreads JPDFHYI index energy and ex-energy, basis points JULIS index, basis points JPSYAGSW index, basis points 600 2,200 1,000 2,000 550 900 500 1,800 800 450 1,600 Energy 400 1,400 700 350 1,200 600 1,000 300 500 800 250 400 200 600 300 150 400 100 200 Ex Energy 200 50 0 100 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2014 2015 2016 2017 2018 2019 2020 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: Bloomberg, J.P. Morgan. March 18, 2020. Source: Bloomberg, JPM HY Strategy team. March 18, 2020. Source:Bloomberg, J.P. Morgan. March 18, 2020.

Fixed rate preferred securities option adjusted spread AAA asset backed securities spreads 30Y fixed mortgage - 10Y US Treasury POP1 index, basis points basis points basis points 650 350 1,600 600 1,400 550 500 300 1,200 450 Prime auto 1,000 400 350 250 800 300 Credit card Commercial 600 250 200 200 real estate 400 150 200 100 150 50 0 0 -200 -50 100 2000 2004 2008 2012 2016 2020 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Source: Bloomberg. March 18, 2020 Source: J.P. Morgan. March 18, 2020. Source: Bloomberg. March 18, 2020.

25 Credit markets

Libor - federal funds rate basis points 100 90 80 70 60 50 40 30 20 10 0 2015 2016 2017 2018 2019 2020 Source: Bloomberg. March 18, 2020.

26 Emergency facilities, 2008-2009

Emergency facilities created by the Federal Reserve during the Financial Crisis Peak Outstanding Balance ($ bn) Term Auction Facility $493 Commercial Paper Funding Facility $348 Term Securities Lending Facility $236 Asset-Backed Commercial Paper Money Market $152 Mutual Fund Liquidity Facility Primary Dealer Credit Facility $147 Term Repurchase Transactions $80 AIG Revolving Credit Facility $72 Term Asset-Backed Securities Loan Facility $48 Source: Levy Economics Institute, Bard College. 2011.

27 How far do earnings fall in a recession?

S&P 500 earnings drawdowns Maximum drawdown of earnings per share 0% -10% -20% -30% -40% -50% -60% Operating earnings -70% -80% -90% Reported earnings -100% 1870 1890 1910 1930 1950 1970 1990 2010 Source: Robert J. Shiller, S&P Dow Jones Indicies. Q4 2019.

28 Earnings drawdowns, US vs Europe

European profits more sensitive to recessions Maximum drawdown of earnings per share for respective MSCI country index 0%

-20%

-40%

-60%

-80% France Germany Italy USA

-100%

84 00 16 70 72 74 76 78 80 82 86 88 90 92 94 96 98 02 04 06 08 10 12 14 18 20 Source: J.P. Morgan Securities Inc., MSCI, Bloomberg. February 2020.

29 What are equity markets now pricing in regarding S&P 500 earnings?

US EPS level implied by dividend futures % of pre-virus level 20% Pricing on Jan 20 10%

-10%

-20%

-30% Pricing today -40%

-50% 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: Bridgewater. March 17, 2020.

30 What kind of crises play out over many years instead of over shorter periods?

31 Time capsule: disaster, ruin and recovery

“What has so often excited wonder, is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” John Stuart Mill, Principles of Political Economy, 1848

32 A lot has changed in medical science in 100 years

US life expectancy at birth Spanish Flu (1918): % of cultures containing bacteria years causing secondary respiratory infections/pneumonia 85 100 No bacteria found 80 90 All other bacteria 75 80 70 70 65 60 60 Female 50 40 Bacteria causing secondary respiratory infections 55 30 (Streptococcus pneumoniae/hemolyticus, Staphylococcus 50 aureus, other/mixed pneumopathogens) 20 45 Male 10 40 0 35 Military samples Civilian samples Total

Source: "Predominant Role of Bacterial Pneumonia as a Cause of Death in

1975 1990 2005 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1980 1985 1995 2000 2010 2015 1900 Pandemic Influenza," National Institute of Allergy and Infectious Diseases, Source: US CDC; Andrew Noymer, Public Health Dep't, UC Irvine. 2020. Morens et al, 2008

33 A lot has changed in medical science in 100 years

Male life expectancy in France years 80 This chart is a proxy for two things: 70 [1] astounding medical achievements of the 20th century, including tools scientists are now 60 using to develop vaccines and anti-viral 50 Absence of data during medications to combat COVID-19 French Revolution [2] greater threats to life expectancy and 40 World War II prosperity have in modern times resulted less (1939-1945) 30 from pandemics and natural disasters, and more War of 1870 World War I from what people do to each other in times of 20 Napoleonic (1914-1918) war wars 10 1740 1770 1800 1830 1860 1890 1920 1950 1980 2010 Source: French Institute for Demographic Studies (INED). 2018.

34 Time capsule: disaster, ruin and recovery

Post Civil War recovery in Confederate farm income Index, 100 = 1859 108 US Civil War: deadliest conflict in US history, 104 with 6x mortality rate as World War II...it left the southern US in complete shambles… fought 100 mostly on southern soil, leaving many cities in 96 ruins with thousands of people lacking food, clothing, or shelter… Federal government did 92 very little to assist them…and yet, look how quickly Confederate farm income rebounded 88 after the war 84 1859 1862 1865 1868 1871 1874 1877 1880 Source: "Economic Behaviour in Adversity", Jack Hirshleifer, The University of Chicago Press, 1987.

35 What kind of crises require years for economies to recover? Colossal wartime destruction…

It took a full decade for Germany and Japan to recover from WWII, Real per capital GDP, 1990$, thousands 600 By 1945, 20% of Germany’s housing stock was 550 Germany destroyed, food production was half of 1938 levels, 500 450 industrial production was down by a third and caloric 400 intake was around 1,250 calories per day (average 350 American consumers 3,600 per day) 300 250 Japan As for Japan, around 40% of its capital stock, a quarter 200 of all housing and 180 miles of 67 cities were 150 destroyed by the war 100 1930 1935 1940 1945 1950 1955 1960 Source: Angus Maddison (Historical Statistics of the World Economy), JPMAM. 2020.

36 What kind of crises require years for economies to recover? Or colossal economic mismanagement…

China's disastrous Great Leap Forward Percent Calories/day 30% 2,300 Dutch historian Frank Dikotter, 25% US historian R. Joseph Rummel: 2,100 Calories/Day Great Leap Forward was the largest 20% (RHS) democide in human history 1,900 15%

1,700 10% Mortality rate (LHS) 5% 1,500 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Source: "Visualizing the Effects of the Great Leap Forward", Basil Ashton, '84.

37 Concluding with a time capsule of markets bottoming while fundamentals were still getting worse

38 Time capsule: high yield markets tend to bottom well before defaults peak

Savings and Loan Crisis Tech collapse Financial crisis Spread-to-worst # of Issuers Spread-to-worst # of Issuers Spread-to-worst # of Issuers 1,200 300 1,200 500 2,500 250 High Yield credit 450 spreads 1,000 High Yield 250 1,000 High Yield credit 400 credit spreads 2,000 spreads 200 350 800 200 800 300 1,500 150 76% 600 150 600 250 Cumulative defaults 55% 200 1,000 100 400 100 400 Cumulative defaults Cumulative defaults 150 30% 100 500 50 200 50 200 50

0 0 0 0 0 0 1987 1988 1989 1990 1991 1992 1993 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 Source: J.P. Morgan Securities LLC. February 2014. Source: J.P. Morgan Securities LLC. February 2014. Source: J.P. Morgan Securities LLC. February 2014.

39 Time capsule: bank stocks tend to bottom well before the peak in bank failures

The Great Depression: Equity market vs. bank failures Savings and Loan Crisis: Bank stocks vs. bank failures Financial crisis: Bank stocks vs. bank failures Index level Total institutions Index level Total institutions Index level Total institutions 400 10,000 120 1,800 300 500

9,000 350 110 Cumulative 1,600 250 8,000 Bank Failures Dow Jones Industrial 1,400 S&P 500 Bank Index 400 300 Average 100 7,000 1,200 200 250 90 6,000 S&P 500 300 63% Bank Index 1,000 SCAP 200 48% 5,000 80 150 800 4,000 150 70 200 600 100 3,000 100 Cumulative Bank 60 Cumulative Bank 400 Failures 2,000 Failures 100 50 50 1,000 50 200 8%

0 0 40 0 0 0 Jan-29 Oct-29 Aug-30 Jun-31 Apr-32 Feb-33 Dec-33 Mar-88 May-89 Jun-90 Jul-91 Aug-92 Sep-93 Oct-94 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: FDIC, Bloomberg. March 2014. Source: FDIC, Bloomberg. March 2014. Source: FDIC, Bloomberg. March 2014.

40 Time capsule: credit markets tend to bottom way before default rates peak

Leveraged Loan prices vs. defaults: 2006 to 2011 CMBS spreads vs. delinquency rates: 2006 to 2014 Price index Default rate AAA CMBS Spread (basis points) 60+ day delinquency rate 105 9% 1,600 9% 100 8% 1,400 8% 7% 95 7% 1,200 60+ delinquency rate 90 6% 6% Leveraged Loan 1,000 85 Price Index 5% 5% 800 80 4% 4% 600 AAA CMBS 75 3% Spread 3% 70 Defaults over 2% 400 2% 65 trailing 12 months 1% 200 1% 60 0% 0 0% 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: J.P. Morgan Securities LLC, Standard and Poor's, S&P/LSTA Leveraged Loan Index. February 2014. Source: Trepp, J.P. Morgan Securities LLC. February 2014.

41 Important Information

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