Quarterly MARKET & ECONOMIC PERSPECTIVE

Q 1 2 0 2 0 Quarterly MARKET & ECONOMIC PERSPECTIVE introduction A Quarter Like We've Never Seen As we sit down to write this piece in whatever amount of time economists early April 2020, we think it’s important spend putting together their detailed to acknowledge a few things. First, we forecasts, at the end of the day, they are are hoping you and your families are still just forecasts. We shouldn’t fully safe and well. Second, we understand rely on forecasts because unforeseen that there is a lot of anxiety about the events like COVID-19 can throw crisis itself as well as the downstream everything out the window. repercussions, both from a human and economic perspective; and there are still a lot of unknowns. Third, the virus is moving across the globe and events are changing rapidly. It is quite possible there will be some new information that makes this quarterly review moot by the time you read it, but we are going to move on with what we know now. Hopefully you have been using this time to do some activities you don’t have the time to enjoy normally, and maybe you are one of the many binge-watching Tiger King. To show how unusual this quarter has been, it was January 11 when the Dow closed above 29,000 for the first time, expressing investors’ optimism over the US/China trade deal. It was also only February 19 when the S&P 500 hit an all-time-high, capping the longest bull market in history. Less than 1.5 months later, its quarter end return was -19.6% (source: Morningstar Direct), highlighting the speed and sharpness of the market turnaround. In our last quarterly review, we wrote about the challenges of making investment predictions. This recent experience reinforces our view that Q1 2020 MARKET & ECONOMIC PERSPECTIVE keeping a Understanding balanced approach the economic summary fallout Health crisis (Covid- Unlike the financial crisis of 2008-09 19) leads to which started on Wall Street and economic crisis moved onto Main Street, this current S&P hit an all-time crisis moved from Main Street to Wall high on February 19, Street. The short story is we have a 2020; then global pandemic that is impacting experienced its supply and demand at different fastest move to a times and in different places. We bear market in have seen countries handle the history The longest bull market run in health crisis differently; we have history has ended seen it even among states in our own country. What makes this crisis so This crisis has been more challenging is that our economy is about a flight to liquidity over set up for high connectivity while the a flight to quality health response calls for social distancing. positive signals From an economic perspective, we Unprecedented global have seen a multi-pronged approach monetary & fiscal policy from both a monetary and fiscal response to help stabilize policy perspective. On the monetary markets side, we have seen aggressive action While still negative YTD, from the Federal Reserve. equity markets have Acknowledging they were slow to act experienced recovery in the 2008-09 financial crisis they have been much more decisive this reasons for concern time by throwing the kitchen sink at Total cost of economic fallout the issue and have done so quickly. For example, they lowered Fed still unknown Funds rates twice (first to 1%-1.25% "Sell everything" approach in and then essentially to zero) and flight to liquidity drove down have announced or already prices of many/most securities; implemented several programs. high volatility across markets Some of these programs, like quantitative easing, where the Fed is purchasing $500M in Treasuries and $200M in Agency Mortgage Backed Securities, were ones used during the Financial Crisis. However, they have also announced new and Q1 2020 MARKET & ECONOMIC PERSPECTIVE unprecedented programs like the Primary Market Corporate Credit Facility, where they are purchasing high grade corporate credit. The sum of these programs is to keep financial markets functioning. While the Fed has used a lot of bullets from their arsenal, there is still more they So, is the US economy about to can do. enter or already in a recession? The National Bureau of Economic Enter the US government and fiscal Research (NBER) is the non- policy measures. Specifically, the partisan group that officially government passed the Coronavirus determines the start and ending Aid, Relief and Economic Security period of recessions. As a rule of (C.A.R.E.S.) Act. Another thumb (not the official definition), unprecedented step, this $2T (that is a recession is often defined as two trillion with a T) package goes down consecutive quarters or six straight as the largest in US History, months of negative economic significantly larger than the $831B growth (GDP). Therefore, a American Recovery and Reinvestment recession is only announced after it Act of 2009. The CARES Act covers has already started, meaning it is direct cash payments to individuals entirely possible we are currently that qualify, expanded in one though it may not be unemployment insurance, support for formally announced for months. In small businesses and provides aid for the end, the duration and depth of state/local governments. Like what the health crisis will likely be the the Fed is doing, the CARES Act is major determinant of the economic meant to limit economic fallout. At outcome. the same time, we recognize the enormous debt burden these costs To keep things in perspective, the are creating, and we are thinking year-to-date return for the S&P 500 through various scenarios and how to through March 31, 2020 was -19.6%. mitigate the impact to investors. As a reference point, the annual return for the S&P 500 in 2008 was So, what’s next? While monetary and -37%. In other words, while seeing fiscal stimulus are definitely helping equities fall 20% is never fun, we to stem the tide, unfortunately they have seen declines like this before. are not a cure to what ails us in the As an advisor, our goal is to first place, the virus itself. Having a develop a long-term financial plan vaccine, some other medication or that considers both your goals as method to limit the effects of the well as your tolerance for risk. virus, or simply seeing a reduction in Unless one of those items has its spread will help us know we are changed, we recommend sticking on the road to recovery, both from a with your plan and maintaining health and economic perspective. discipline through these turbulent times. Q1 2020 MARKET & ECONOMIC PERSPECTIVE Overall, several themes continued as large cap stocks outperformed U.S. Equity small cap stocks over the quarter (the Russell 2000 benchmark To show the swiftness of the decline suffered its worst quarter on in a picture, the chart below shows record), likely due to beliefs that just how quickly the S&P fell by 10% larger cap companies have more from its peak on February 19, the liquidity and access to capital fastest correction on record. during a crisis. From a sector perspective, energy stocks have been hit the hardest from the one- two combination of almost complete demand destruction (e.g. no one is driving or flying) and a price war between Russia and Saudi Arabia. The S&P also broke the record for fastest decline to a bear market, defined as a drop by 20% from peak levels, taking only 22 days or 15 trading days (source: Payden and Rygel, looking at post-war history). It’s also instructive to remember that the indexes shown above represent what happens in various slices of the markets, which is different from the economy. Said differently, equity markets are comprised of various stocks while the economy is the sum of the goods and services produced. For example, getting a haircut at a salon is a service included in economic activity measurements, but isn’t measured by a particular stock. Also, consider that one way to measure a stock’s value is to look at its expected future cash flows. Therefore, it makes sense that the markets anticipate where the economy is expected to be, not necessarily where it is today. Q1 2020 MARKET & ECONOMIC PERSPECTIVE that China is a large portion of the index, it may come as a surprise that Non-U.S. China actually outperformed the US, declining -10.3%. However, other countries with larger weightings in Equity emerging markets did not fare as well including Taiwan (-19.6%), India International stocks as a whole (-31.8%), Brazil (-50.8%) and South underperformed their US Africa (-41.6%) (source: MSCI EM IMI). counterparts during the quarter. Similar to in the US, large cap stocks Overall, international equities remain outperformed small cap and growth undervalued relative to both stocks outperformed value. historical averages and current US valuations. Investors should also Not surprisingly, non-US markets keep in mind the return of have also been impacted by COVID- international equities can be driven 19. In the case of China, where the by the dollar’s relative strength or virus started, the impact was felt weakness versus foreign currencies earlier than places like Italy, which (the Wall Street Journal Dollar Index started seeing cases a little later. ended the quarter higher/stronger). Like the Fed, global central banks are Overall, almost all developed and taking action to support their emerging market currencies economies. depreciated versus the dollar over the quarter. Within developed nations, the returns coming from different countries were quite diverse ranging from Denmark (-9.6%) to Austria (-38.2%).

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