THE DEATH OF EQUITIES REDUX HOPE IS NOT A STRATEGY. NEITHER IS FEAR.

INVESTMENT STRATEGY GROUP

Spring 2020 INVESTMENT STRATEGY GROUP

THE DEATH OF EQUITIES REDUX

Hope is not a strategy. Neither is fear. Events over many years have arisen that appeared to threaten what had been an inexorable rise in the U.S. market. Selling on fear of these events typically proved to be a major mistake. Through the last century, the equity market faced more than 100 events of varying severity that held the potential to derail stocks. This report focuses on 30 of these consequential events. GREGORY M. DRAHUSCHAK Equity Market Strategist The title of this report was borrowed from At the December 31, 2019, close, the S&P Greg Drahuschak is the infamous August 13, 1979, Business Week 500 was 58.93 times higher than it was a Market Strategist cover story that focused on burgeoning when this study began May 28, 1962. This is and provides frequent inflation, an institutional exodus from the stock a compounded annual growth rate of 7.01%. commentary with market, a 700% rise in the price of gold, and Including dividends, the annual total return particular focus on the equity market. He joined rapidly rising interest rates. These items and for the past 60 years is 10.12%. others cited in the magazine article declared Janney in 1991 and has The economy either was on the cusp of a more than 45 years of that the stock market’s role in creating wealth recession or already in one in three of the economic experience. was over. As one economist then stated: instances of losses five years after an “We have entered a new financial age. Greg has written articles event. The other two came at the end of for several newspapers The old rules no longer apply.” and websites, and has what commonly has been called the been the visiting expert However, one, two and 10 years from “dot-com bubble.” on many live radio publication of the Business Week article, Some of these 30 events elicited much broadcasts. He earned the S&P 500 was up 14.76%, 24.29%, and stronger reactions than others. The nation his B.A. in fine arts from 219.36%, respectively. Indiana University of was riveted on November 22, 1963, after the Pennsylvania, as well assassination of President John F. Kennedy as certificates from the MARKETS RECOVER FROM CRISES that virtually brought commerce to a halt for Wharton School of the University of Pennsylvania During the 30 events in our focus, five years several days. Five years later, the S&P 500 and from the New York afterwards the S&P 500 was down only five was 98.73% higher. Institute of Finance. times and after 10 years, was lower only once.

Chart 1: S&P 500 – January 1, 1969S&P to 500 February - January 25, 2020 1, 1969 to February 25, 2020

50

(Source: Thomson Financial; Janney Investment Strategy Group)

WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • THE DEATH OF EQUITIES REDUX • REF: 200305 • PAGE 2 Perhaps no event was more shocking than the 9-11 attack 500. The severe acute respiratory syndrome (SARS) virus on the World Trade Center and the Pentagon. Five years in 2003, H1N1 in 2009, Middle East Respiratory Syndrome later, the S&P 500 was 18.89% higher. Not even the largest (MERS) in 2014, Ebola in 2014, and ZIKA in 2016, all weighed one-day percentage drop in history was enough to prompt on the market for a time. Following the first cases of each lasting market damage. For reasons that today are still not virus in the United States, however, the S&P 500 on average completely understood, the stock market fell 22.6% on was up 8.7% and 10% in the first 60 and 90 days. A long-term October 19, 1987. Ten years later, it was up 189.73%. look is even more important. As the chart below illustrates, one, five, and 10 years after HEALTH OUTBREAKS HAVE NOT HAD three of the prior health scares, the S&P 500 was notably LASTING IMPACTS higher. One year following the Ebola scare, the S&P 500 was Market reactions to previous health scares are not down 2.65%, but two years after the event it was up 9.94%. included in our summary of previous market events. The speed and severity of the recent market decline from The following specifically focuses on the market reaction its high is unlikely to be recovered as rapidly as the decline to the current coronavirus (COVID-19) and what happened unfolded, as effects on global commerce from the virus after similar events. outbreak likely will linger for a time. The coronavirus along with several other factors took a History, however, strongly indicates that the passage heavy -term toll on the market. At its thus far 2020 of time and the size and diversity of the U.S. economy peak of 3393.52, the S&P 500 on February 19 was 5.04% eventually allow the market to recover and continue on above its 2019 close. By March 12, the S&P 500 was down what has been its inexorable long-term rise. We expect the 26.3% from its intraday all-time high and down 22.6% from same pattern to be true as the market works through where it ended last year. This was the fastest decline of another event that threatens it. 20% or greater from a record high in the history of the S&P

Health Scares and the Market Percentage Change Afterwards Chart 2: Health Scares and the Market Percentage Change Afterwards

245.00 243.84 235.00 225.00 215.00 205.00 195.00 185.00 175.00 165.00 155.00 145.00 1 year later 5 years later 10 years later 135.00 129.23 125.00 115.00 105.00 95.00 85.00 75.00 60.88 65.00 59.20 56.59 55.00 50.93 43.34 45.00 35.00 25.00 21.94 19.85 12.40 15.00 5.00 (2.65)

5.00 Sars 1/2/2003 H1N1 3/25/2009 MERS 5/2/2014 Ebola 9/30/2014 ZIKA 2/2/2016

(Source: Thomson Financial; Janney Investment Strategy Group)

WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • THE DEATH OF EQUITIES REDUX • REF: 200305 • PAGE 3 For reference, the chart below illustrates the 30 prior major events that incorrectly appeared to be major long-term problems.

Chart 3: Major Market Events – Percentage Change Five and 10 Years Later

330.00 310.00 290.00 270.00 250.00 230.00 210.00 190.00 170.00 150.00 130.00 110.00 90.00 70.00 50.00 30.00 10.00 (10.00) (30.00)

5-year Change 10-year change

* Results are through 2.25.2020 (Source: Thomson Financial; Janney Investment Strategy Group)

Chart 4: Percentages By Event

5–YEAR 10–YEAR 5–YEAR 10–YEAR CHANGE CHANGE CHANGE CHANGE Cuban missle crisis 63.93 98.83 Dot-com bubble (13.48) (17.88) Kennedy assassination 98.73 85.90 September 11 attacks 18.89 6.38 Brazilian Markets Crash of 1971 4.51 30.06 Stock market downturn of 2002 99.88 85.58 Ol shock and recession (20.15) 16.15 Chinese stock bubble of 2007 (2.38) 69.38 Nixon Resignation 30.46 104.72 United States bear market of 2007–09 (7.84) 64.39 Business Week cover 44.63 229.33 of 2007–08 39.09 138.04 Kuwait market crash 192.40 290.06 2009 Dubai debt standstill 89.91 188.93 1987 27.74 189.73 European sovereign 78.90 164.27 Brazil market Crash 41.78 301.98 80.17 169.74 Failed UAL takeover 34.65 274.73 August 2011 stock markets fall 68.90 143.07 Early 1990s recession 51.51 308.73 2015–16 Chinese 49.38 49.38 Japanese asset price bubble 88.68 293.10 Brexit low 53.54 53.54 125.59 112.21 * 12/24/2018 sell off 33.05 33.05 1997 Asian financial crisis 7.15 68.07 2020 Coronavirus Crash ? ? October 27, 1997, mini-crash 2.36 75.71 Long-Term Captial collapse (8.31) 18.34

* Results are through 2.25.2020 (Source: Thomson Financial; Janney Investment Strategy Group)

Disclaimer: Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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