Market Digest – March 2020

Positioning in a bear market

Table of contents Executive Summary 2 Global Allocation 3-5 U.S. Stock Market 6-8 U.S. Sectors 9-10 Energy 11-12 Global Economics 13-15 U.S. Fixed Income 16-20 U.S. Economics 21-23 Ned’s Insights 24 AMY LUBAS, CFA, DIRECTOR, WEALTH Glossary of Terms 25-26 MANAGEMENT & ADVISORY SOLUTIONS House Views 27 CHAD ELLIS, RESEARCH ANALYST MARKET DIGEST SUMMARY

AMY LUBAS, CFA DIRECTOR, WEALTH MANAGEMENT & ADVISORY SOLUTIONS CHAD ELLIS RESEARCH ANALYST

MARCH 16, 2020

Executive Summary

De-risked across the board How the current cyclical bear compares to previous bears Coronavirus (COVID-19) continues to domi- A History of Bear Markets II: Dow Jones Industrial Average (1900-Present) nate world news. Since last month’s update, the -10 Current bear 1953 Sources: S&P Dow Jones Indices 2016 virus’ rapid spread outside of China, announce- 1984 1971 1949 1980 Ned Davis Research Calculations 2011 1960 1923 ment as a pandemic, and increasing fears of an -20 20201998 1957 1990 19391934 1947 1982 1914 economic recession have rattled investors. All 1966 1962 1978 1911 -30 markets have taken a beating in March thus 2001 2002 far — we are officially in an NDR-defined bear 1987 1970 1933 -40 market. As such, we made several position 1917 1942 changes over the past couple of weeks. 1974 1921 1903 1929 -50 1938 1907 Loss % • On March 6, we de-risked in fixed 2009 income. We increased our duration -60 to 110% from 100%, as the demand for safe, long duration assets continues. In -70

Cyclical Bears Independent of Recessions light of recent market developments, we Mean for Cyclical Bears Independent of Recessions (-25.0% Loss, 200 Days) Cyclical Bears Coinciding with Recessions -80 downgraded investment grade credit, Mean for Cyclical Bears Coinciding with Recessions (-34.5% Loss, 369 Days) Mean for All Bear Markets (-30.9% Loss, 307 Days) CMBS, MBS, and ABS to underweight, Current Bear Market Days = market days 1932

joining our underweight on high-yield. 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 625 650 675 700 725 750 775 800 Market Days Treasurys are the beneficiaries at over- S0202D © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html weight. For data vendor disclaimers refer to www.ndr.com/vendorinfo/ • On March 9, we moved to a bearish view on oil. An OPEC price war occur- thrusts (without an intervening thrust to Consumer Staples to overweight ring in the midst of a global demand the downside). and Real Estate to marketweight. With shock (i.e., the coronavirus outbreak) is • On March 12, we shifted 5% from many now expecting flat to down earn- completely unprecedented. We are in stocks to bonds in re­sponse to model ings growth for the S&P 500, Consumer unchartered territory. and indicator deterioration. This move Staples’ mid-single-digit earnings growth • On March 10, we went cautious on brings us more in line with our Global should look superior. We also down- U.S. stocks, which means sub-par Balanced Account Model at 50% stocks graded Industrials, Financials, and returns. The market decline has met the (now underweight), 45% bonds (more Energy to underweight. NDR criteria for a cyclical bear mar- overweight), and 5% cash (under­ ket. To date, the decline is smaller than weight). We are watching for indicator Economic impact the median bear (chart above), but developments that would be consistent Whether the hit to economic activity is clas- more importantly, it is the shortest on re- with a bottoming process or continued sified as recession or not will largely depend cord. Market bottoms are a process that weakness. on its duration. Recent monetary and fiscal take time. The four steps are: 1) oversold; • On March 13, we got more defensive policy announcements are trying to mitigate 2) rally; 3) retest; and 4) positive breadth in our U.S. sector allocation. We lifted the damage.

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TIM HAYES, CMT CHIEF GLOBAL INVESTMENT STRATEGIST ANOOP NATH, CFA GLOBAL ANALYST

MARCH 16, 2020

Volatility has returned, stocks downgraded

After spiking, VIX tends to stay high VIX around Spikes over 30 Key Takeaways 55.0 Source: Chicago Board Options Exchange, Incorporated. www.cboe.com 55.0 Current Case (2020-02-27) 52.5 Average of All Cases* 52.5 * Based on the average of the 18 cases listed below going back to 1990. 50.0 Excludes current case. 50.0 • Shifted 5% from stocks to 47.5 47.5 bonds in response to model and 1990-08-06 2007-08-15 45.0 1997-10-27 2008-03-14 45.0 indicator deterioration. 1998-08-04 2008-09-15 42.5 1999-02-08 2009-05-21 42.5 2000-04-14 2010-05-06 40.0 2000-12-20 2011-08-04 40.0 • Now 5% underweight stocks and 2001-09-07 2015-08-24 37.5 2002-07-09 2018-02-05 37.5 10% overweight bonds at 50% 2003-01-24 2018-12-21 35.0 35.0 stocks, 45% bonds, and 5% cash 32.5 32.5 allocation. 30.0 30.0

27.5 27.5 • Watch for indicator developments 25.0 25.0 that would be consistent with a 22.5 22.5 bottoming process or continued 20.0 20.0 weakness. 17.5 17.5

15.0 15.0

12.5 12.5 Crosses above 30 for the first time in six months Just when it looked like the global stock -3 -2 -1 0 1 2 3 Months Prior | Months Post market advance would start to broaden INF20_10A_C © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html — anticipating a strengthening economic For data vendor disclaimers refer to www.ndr.com/vendorinfo/ recovery — along came the coronavirus panic to knock it back down. And just stocks (5% underweight), 45% bonds likely an oversold bounce than the start when the indicator evidence had improved (10% overweight), and 5% cash (5% of a sustained recovery. On February 27, enough to warrant an allocation shift from underweight). the VIX reached a level that has tended bonds to stocks, along came the most to be followed by a median drawdown of decisive wave of indicator deterioration This move recognizes the magnitude of -19.4% in the All-Country World Index. The since 2018. the economic hit from the coronavirus current drop has been -19.7%, with volatility response and the time that will most remaining elevated. With our current intra-month estimate likely be required for economic conditions for the Global Balanced Account Model to improve — even if global cases of Rising above its Bottom Watch parameter showing the stock allocation dropping COVID-19 follow China’s trend and start to of 43, the VIX has reached levels last to 46% and the bond allocation rising subside. seen in 2009. While there’s no way of to 50% — with the remainder in cash — knowing how high the VIX will rise, history we shifted 5% from stocks to bonds It also recognizes that the market’s attempt suggests we won’t see a return to low on March 11. This brings the allocation to stabilize and turn higher has failed volatility any time soon (chart above). more in line with the model at 50% miserably, with the March 10 rebound more

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Until volatility subsides to such an extent Rising VIX, dropping yields and equities Daily Data 2010-03-11 to 2020-03-10 that a VIX downtrend is established, stocks One-Year Correlations- ACWI, VIX & 10-Year Treasury Yield 60 S&P 500 Volatility Index (VIX) (2020-03-10 = 47.3) Source: Chicago Board Options Exchange, Incorporated. www.cboe.com 60 should have trouble recovering, considering 50 50 the strong inverse correlation between the 40 40 30 30

VIX and the All Country World Index (ACWI) 20 20 (chart right, third clip). Given the inverse 10 10 10-Year Treasury Yield (2020-03-10 = 0.8%) correlation between the VIX and the 10-year 4.0 4.0 3.5 3.5 Treasury note yield (bottom clip), falling bond 3.0 3.0 2.5 2.5 yields can be expected with bouts of volatility. 2.0 2.0 1.5 1.5 1.0 1.0 0.5 Source: Federal Reserve Board 0.5 Source: MSCI When coronavirus worries start to subside -0.65 -0.65 and global economic activity starts returning -0.70 -0.70 to normal, we will likely see stock prices -0.75 -0.75 moving higher with rising bond yields and a -0.80 -0.80 -0.85 -0.85 falling VIX. But there’s not yet any evidence Rolling One-Year Correlation: Daily % Change of VIX & MSCI ACWI 2020-03-10 = -0.80 -0.1 -0.1 that such a recovery is at hand, hence -0.2 -0.2 our overweight allocation to bonds and -0.3 -0.3 -0.4 -0.4 underweight allocation to stocks. -0.5 -0.5 -0.6 -0.6 Rolling One-Year Correlation: Daily % Change of VIX & 10-Year Treasury Yield 2020-03-10 = -0.42 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 As long as stock volatility remains elevated, Data Range (Years): 1 2 5 10 Max high bond volatility can be expected to I87_CORR © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Stock/bond ratio at new lows continue, both persisting with falling stock Global Stock/Bond Ratio, MSCI ACWI & Global Bond Index Daily Data 2018-01-01 to 2020-03-10 Global Stock/Global Bond Total Return Ratio (2020-03-10 = 160.16) prices and bond yields. And we would see 50-Day Moving Average (2020-03-10 = 186.29) 200-Day Moving Average (2020-03-10 = 180.21) a continuing downtrend in the ratio of our 191 191 stock benchmark (the ACWI Total Return 182 182 Index) to our bond benchmark (the Barclays 174 174

166 166 Aggregate Bond Total Return Index). The 158 158 stock/bond ratio has now broken its 2018 151 Source: MSCI 151 MSCI ACWI Total Return (2020-03-10 = 1,204.40) low (chart, left) reaching its lowest level 50-Day Moving Average (2020-03-10 = 1,373.88) 200-Day Moving Average (2020-03-10 = 1,307.33) since December 2016.

1,380 1,380 1,318 1,318 1,259 1,259 In our Rally Watch report, the breadth indica- 1,202 1,202 1,148 1,148 tors remain broadly negative, with an aggre- 1,096 1,096 1,047 1,047 gate reading of just 6% — a sentiment compo- 1,000 Source: MSCI 1,000 Barclays Global Aggregate Total Return Bond Index (2020-03-10 = 586.74) nent is all that’s favorable. And the downside 50-Day Moving Average (2020-03-10 = 575.95) 200-Day Moving Average (2020-03-10 = 566.97) momentum has become more evident in our 589 589 575 575 10-indicator Bear Watch report. Three indica- 562 562 550 550 tors have now reached bear market levels and 537 537 a fourth is close to following suit. 525 525 513 513 501 Source: Bloomberg Barclays Indices 501 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Yet, we wouldn’t dismiss the possibility that 2018 2019 2020

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indicating that the majority of its indicators exposure — we would be likely to upgrade consider stock valuations justified and have reached levels consistent with a stocks again. would rather seek safety in bonds and gold. market bottom. Until then, we would play it safe with an However, it would be premature to underweight allocation to stocks and Previously when at least half of the conclude that a recovery is at hand, given overweight allocation to bonds. indicators have moved beyond their key the worsening trend, momentum and levels, global stocks have tended to start a breadth reflected by the model, the Rally Above excerpted from: “Allocating in sustained rally about a month later (chart Watch and the Bear Watch. They have volatility” by Tim Hayes, March 11, 2019 below). If that happens again — confirmed been saying, there may be “more carnage (available through NDR’s Institutional by breadth thrusts, the majority of our to come.” The worsening global breadth product offerings) Rally Watch indicators reaching bullish has been a sign that, with economic levels, and the model calling for more stock expectations worsening, investors do not

Increased potential for market bottom Maximum Rallies in MSCI ACWI vs. Bottom Watch Indicators Daily Data 2010-03-12 to 2020-03-13 MSCI ACWI (2020-03-13 = 532.42) 794 Bulllliish Siignall on 2020-03-09** 794 Market Return Since Signal: -4.5% 631 631

501 501

398 398

316 316

251 22.7 251 18.6 Source: MSCI Percentage of Bullish Bottom Watch Indicators (2020-03-13 = 71.43)

80 80

60 60

40 40

20 20

0 0 Bracket = 50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

** Bulllliish Siignall Expiires on 2020-12-09 or After a 10% Correctiion from the Siignall Date,, Whichever Occurs First.

Bullish signals (vertical dashed lines) = % Bullish Total Valid Cases Signal Median Median Rally Length Median Length to Rally Indicators first crosses above 50. Cases (>3% Rally) Accuracy (%) Rally (Calendar Days) (Calendar Days) Repeat signals screened for 9 months. After screening period the % bullish must reverse above 8 7 87.5 24.9 201 36 the bracket from below to trigger a new signal. Green shaded periods = rallies > 3% during the 9 months following signals (signal dates followed by corrections of 10% or more excluded). Yellow shaded periods = cyclical bears in the MSCI ACWI

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ED CLISSOLD, CFA CHIEF U.S. STRATEGIST THANH NGUYEN, CFA SENIOR QUANTITATIVE ANALYST

MARCH 16, 2020

Cautious on U.S. stocks

31% drop in Value Line index met NDR’s bear market criterion Weekly 1/08/1965 - 3/13/2020 (Log Scale) Value Line Composite Index vs S&P 500 Stock Index Key Takeaways 554 Value Line Composite (Geometric) 485 Scale Right 425 373 3067 3/13/2020 = 382.60 327 2514 286 • Until the market proves it is 2060 251 1689 220 further along in its bottoming 1384 193 1134 169 process, we moved to a cautious 930 148 762 130 position on the U.S. stock market. 625 114 512 100 420 87 344 S&P 500 77 282 Scale Left 67 • The decline has met the NDR 231 3/13/2020 = 2711.02 59 189 52 criteria for a cyclical bear market. 155 127 104 85 70 Source: Value Line, S&P Dow Jones Indices • To turn positive, watch for 208 Value Line / S&P 500 Rising = Low Quality Leadership 208 171 171 economic and earnings clarity, 140 140 115 115 slowing of COVID-19, and 94 94 77 77 technical improvement. 63 63 52 52 43 43 35 35 29 29 24 24 19 19 Back to step one 16 Falling = High Quality Leadership 16

Previously, we discussed the four steps to a (AA105) 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. market bottoming process. To reiterate, they See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. are: 1) oversold; 2) rebound; 3) retest; and 4) breadth thrust. The severity of the decline, recession risks, after 50 calendar days, or a 13% decline in the oil collapse, and earnings revisions imply DJIA after 145 calendar days, or reversals of Monday’s meltdown means that the market is that the bottoming process could take time. 30% in the Value Line Geometric Index. The back to step one of our four-step bottoming Until the market proves it is further along Value Line’s 31% decline from its 8/29/2018 process. Monday could mark a selling climax in its bottoming process, we are moving high meets one of the criterion (chart low, but time is as big of a concern as price. to a cautious position on the U.S. stock above). Over 82% of stocks in the NDR All-Cap Equi- market. ty Series made new 252-day lows on March 9, Identifying a bull or bear market can only be the most since August 2011. Cyclical bear done in hindsight. They are not predictions. The stock market decline has met the The value of the objective NDR criteria is that For the bottoming process to progress, look NDR criteria for a cyclical bear market. the current bear can be put into perspective. for rallies with broad participation. Look for de- The traditional 20% rule generates multiple The average cyclical bear market decline clines to have less total volume, less downside “bear markets” during highly volatile periods, is -30.9%. The median decline is 26.0%. At volume, fewer stocks making new lows, and so NDR has three criteria — a 30% drop in -19.3% on the DJIA, the current cyclical bear fewer stocks below their moving averages. the Dow Jones Industrial Average (DJIA) is 6.8% less severe than the median.

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The median decline is 26.0%. At -19.3% on Recessionary bears longer and more severe the DJIA, the current cyclical bear is 6.8% Recession and Non-Recession Cyclical Bear Markets less severe than the median. The most Metric (Median) Recession Bear Non-Recession Bear stunning aspect of this bear market is its speed. It has been only 26 calendar days since the DJIA’s peak. The median cyclical bear has lasted 358 days (one year). Percent Change -35.9 -23.3 Recession versus non- recession Even more so than bull and bear markets, recessions are only known in hindsight. The risk of the coronavirus creating a recession is even harder to handicap because no one knows for how long economic activity will be Number of Days 517 224 impacted, but the market appears to be going through the process of pricing in a recession. The median cyclical bear market associated with a recession has declined 35.9% over 517 days (17 months) versus -23.3% over 224 See T_202 for definitions of bull and bear markets. Recessions based on NBER-defined U.S. days (7 months) for cyclical bear markets not recessions. associated with recessions (table, right). Ned Davis Research T_SSF20_09.1

Cyclical bears within secular bulls shorter and less severe Secular bull versus secular Cyclical Bear Markets within Secular Bulls and Bears bear Metric (Median) Secular Bull/ Cyclical Bear Secular Bear/ Cyclical Bear The stock market likely remains within a long-term, secular bull market. A piece of positive news for stocks is that cyclical bears within secular bulls tend to be less severe, with a median decline of 19.0%, Percent Change -19.0 -33.7 close to the current decline (table, left). Cyclical bears within secular bulls also tend to be shorter, but the median of 245 days (8 months) is much longer than the current cyclical bear. Since the decline was so fast, the time element is as important, if not more important, than price compared to many cyclical bears. Number of Days 245 521

See T_202 for definitions of bull and bear markets. Recessions based on NBER-defined U.S. recessions. Ned Davis Research T_202 (excerpt)

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Earnings risks Margin impact will likely be broader than 2015-16 Monthly Data 1972-04-30 to 2020-02-29 Before Saudi Arabia signaled an oil price S&P 500 Income before Extraordinary Items Margin 12 S&P 500 Income before Extraordinary Items Margin: 10.0% 12 S&P 500 ex. Energy Income before Extraordinary Items Margin: 10.7% war over the weekend, we were concerned 11 11 S&P 500 Energy Income before Extraordinary Items Margin: 1.5% that earnings expectations would have to 10 10 be revised lower. The prospects for lower oil 9 9 prices add another level to the earnings risk. 8 8 7 7

6 6 In 2015-16, Energy sector profit margins 5 5 plunged, while the other 10 sectors were 4 4 3 3 little changed (chart, right). Energy is a 2 2 smaller part of the S&P 500 than in 2015, 1 1 but losses in that sector could drag S&P 0 0 -1 -1 500 profits lower. The risk to sectors -2 -2 exposed to coronavirus means that margin -3 -3 pressure will be broader than in 2015-16. -4 -4 -5 -5

-6 -6

-7 -7

-8 -8

-9 -9

-10 -10 Source: S&P Capital IQ Compustat 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 S0670C © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Will EPS growth fall more than 20%? Trailing four-quarter total GAAP earnings S&P 500 Index vs. GAAP Earnings Growth Monthly Data 1927-03-31 to 2020-09-30 S&P 500 Index (2020-02-29 = 2954.22) year/year percent change troughed at Average PE * 12-Month Earnings (2020-02-29 = 2416.12) -15.4% in 2016 (chart, left). Consensus 1,000 1,000 estimates are calling for 9.4% EPS growth in 316 316 2020, so the risk is for larger-than-normal 100 100

32 32 downward earnings revisions, even if the

10 10 decline is not as severe as 2015-16. Every 2 Source: Ned Davis Research, Inc., S&P Dow Jones Indices 2 post-war earnings decline of more than 20% Y/Y S&P 500 GAAP Earnings Growth (2020-09-30 = 13.31%) Earnings Growth High has coincided with a recession. 1,000 1,000

100 100 10 10 The next bull 0 0 Assuming the coronavirus does not have a -10 -10 -100 -100 lasting impact on the economy, the coming Earnings Growth Low Source: Ned Davis Research, Inc. 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 monetary and fiscal stimulus combined with a deeply oversold market and 4Q EPS Y/Y % Change Date (3rd Clip) (2nd Clip) S&P 500 Index Performance extreme pessimism should set up for a 09/30/2019 (A) $132.90 1.9 Full History: 1927-03-31 to 2020-02-29 12/31/2019 (E) $139.66 5.5 Y/Y Earnings Growth % Gain/ % of powerful cyclical bull market. 03/31/2020 (E) $139.55 3.8 (Latest Actual): Annum Time 06/30/2020 (E) $143.13 5.8 Above 20 2.44 23.15 09/30/2020 (E) $150.59 13.3 Between 5 and 20 6.78 31.37 Between -20 and 5 12.25 37.40 Excerpted from “An NDR-defined bear -20 and Below -13.58 8.07 Average P/E at Earnings Peaks (Down Arrows) = 13.06 Buy/Hold = 5.93% Gain/Annum Average P/E at Earnings Troughs (Up Arrows) = 24.85 market. Back to step one” by Ed Clissold, Based on Earnings Reversals of 10%

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PAT TSCHOSIK, CFA, CMT U.S. SECTOR STRATEGIST ROB ANDERSON, CFA INVESTMENT RESEARCH ANALYST

MARCH 16, 2020

Sector allocation shifts exercising caution

Expect weakness after large, quick price drops Key Takeaways S&P 500 Energy RS Around Crude Oil Corrections (> 25% drop in 21 days) 108.5 S&P 500 Energy / S&P 500, Mean of Historical Events 108.5 108.0 S&P 500 Energy RS (%) After: 108.0 Dates 107.5 6 MONTHS 12 MONTHS 107.5 107.0 1986-01-31 -9.56 7.01 107.0 1991-01-18 -4.35 -16.75 106.5 106.5 • Lifted Consumer Staples to 2000-12-20 7.26 -1.40 106.0 2003-03-21 -6.93 1.93 106.0 overweight, Real Estate to 105.5 2008-10-16 6.14 6.51 105.5 105.0 2014-12-12 -1.45 -18.93 105.0 marketweight; lowered Energy, 104.5 2018-11-28 -9.67 -22.27 104.5 104.0 Mean -2.65 -6.27 104.0 Industrials, and Financials to 103.5 Median -4.35 -1.40 103.5 103.0 103.0 underweight. 102.5 102.5 102.0 102.0 101.5 101.5 101.0 101.0 100.5 100.5 • We also lowered our weighting in 100.0 100.0 99.5 99.5 Materials, while increasing Health 99.0 99.0 98.5 98.5 Care and Consumer Discretionary. 98.0 98.0 97.5 97.5 97.0 97.0 96.5 96.5 96.0 96.0 • If we head toward recession, we will 95.5 Initial 25% Oil Decline Complete 95.5 95.0 95.0 take more defensive actions. 94.5 94.5 94.0 94.0 93.5 93.5 93.0 93.0 92.5 92.5 92.0 92.0 91.5 Source: EIA, S&P Dow Jones Indices 91.5 We are making sector allocation shifts that -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 Months Prior | Months Post are in line with NDR’s downgrades in stock ESX1035F © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html asset allocation, U.S. stocks, fixed income, and For data vendor disclaimers refer to www.ndr.com/vendorinfo/ oil outlooks. Industrials to underweight environment. A very low 10-year Treasury Energy to underweight Industrials seems particularly economically yield and flat yield curve can negatively impact We are lowering Energy to underweight in sensitive given its exposure to the slowing net interest margins and banks have to worry response to Warren Pies’ downgrade of oil. global economy, coronavirus, and oil. Trans- about defaults in industries under stress. Getting hit by both a supply shock and a de- ports, carrying less freight and fewer pas- mand shock could be fatal for some Energy sengers, looks particularly vulnerable. Low oil Staples to overweight companies. The focus now turns to survival prices could be a post-coronavirus positive Consumer Staples’ mid-single digit earnings — a company’s ability to pay dividends and for transports, but we expect capital goods growth is no longer a fear, as the relative interest expense in an extremely difficult to be negatively impacted by a slowdown in growth rate for the current fiscal year is rising operating environment. oil-related capex. and should continue to rise.

The sector has only outperformed 12 Financials to underweight With several analyst’s estimates now showing months after WTI has fallen more than Financials is one of the worst performing sec- flat EPS growth for the S&P 500 for 2020, 25% in a month in three out of seven cases tors six months after a spike in volatility. We mid-single digit earnings growth should look (chart above). are concerned about Banks in such a volatile pretty good (top chart, page 10).

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Real Estate to marketweight Expect relative earnings growth to improve U.S. Sectors & Industries: Earnings Estimates Monthly Data 2000-03-31 to 2020-02-28 (Log Scale) Real Estate has the lowest beta and second- 188 188 S&P 500 Consumer Staples / S&P 500 (2020-02-28 = 121.2) 178 178 highest dividend yield (3.5%) of all sectors 168 168 158 158 and should outperform in this ultra-low rate 150 150 141 141 environment. Investors should be cautious 133 133 126 126 within REITs, however, as some should be 119 119 112 112 negatively impacted by social distancing. 106 106 100 100 Residential and Health Care REITs look like 94 94 89 89 safer places to be. 84 84 79 79 75 75 71 71 Increasing Discretionary 67 Cap-Weighted Index Used Source: S&P Dow Jones Indices 67 20 S&P 500 Consumer Staples 20 - S&P 500 Fiscal We have several reasons for remaining posi- 15 +3 SD 15 Year 2020 Median Expected Growth % (2020-02-28 = -6.0) Staples could see positive tive and increasing our marketweight alloca- 10 relative earnings growth 10 +2 SD tion on the sector including: relative strength 5 like 2001 and 2009 5 trends in Amazon, the sector typically bot- 0 +1 SD 0 -5 -5 Mean toms before a recession is over, Household -10 -10

Durables should benefit from low rates and a -15 -1 SD -15 Dashed Lines = Std Dev cocooning effect, the most severely impacted -20 -20 -2 SD sub-industries account for only 36% of sector, -25 -25 Source: Thomson I/B/E/S, S&P Dow Jones Indices -3 SD consumers should benefit from payroll tax 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ESS_550_30 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior relief/fiscal stimulus and low oil, and it’s the permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/ only overweight in our sector model.

Health Care showing a lower beta over past year Sector Beta to S&P 500 12-month 60-Month Difference YTD Health Care most favored Energy 1.57 1.25 0.32 -44.62 We are reducing our Materials allocation due to global economic concerns and adding to our Financials 1.27 1.17 0.10 -26.22 Health Care overweight — our favorite sector. Information Technology 1.22 1.15 0.07 -9.20 The coronavirus should keep health care services in demand, and political risk is falling Materials 1.22 1.17 0.05 -22.02 with the rise of health care-friendly Joe Biden. Industrials 1.14 1.15 -0.01 -20.50 Health Care’s short-term beta is significantly lower than its longer-term beta (table, left). Consumer Discretionary 0.99 1.08 -0.09 -13.83

Communication Services 0.82 0.94 -0.12 -12.77 Positioning in a recession If it looks like the economy is heading toward Consumer Staples 0.72 0.63 0.09 -8.55 recession, we will get more defensive. We Health Care 0.68 0.90 -0.22 -10.43 would likely reduce higher-beta Technology and Communication Services weights, while Utilities 0.57 0.29 0.28 -6.68 increasing Real Estate and Utilities weightings. Real Estate 0.24 0.59 -0.35 -8.51 Above excerpted from: “Getting in line Source: S&P Dow Jones Indices with a cautious outlook” by Pat Tschosik, YTD is year-to-date absolute price return of S&P 500 sector as of 3/11/2020. Source: S&P Dow Jones Indices. March 12, 2020 (available through NDR’s Ned Davis Research T_IF20_11.6 Institutional product offerings)

PERIODICAL | ISSUE: #MKTDG20200316 | NDR.COM Please see important disclosures at the end of this report. MARCH 16, 2020 10 MARKET DIGEST ENERGY

WARREN PIES, ERP ENERGY STRATEGIST

MARCH 16, 2020

Now bearish on oil

Oil broke down earlier this year Crude Oil - Spot Daily Data 2016-01-04 to 2020-03-06 (Log Scale) Key Takeaways 89 Crude Oil (Brent) 89 84 2 Standard Deviations Above 21-Day Mean 84 79 2 Standard Deviations Below 21-Day Mean 79 75 75 • We downgraded oil from neutral 71 71 67 67 to bearish. 63 63 60 60 56 56 53 53 50 50 47 47 45 45 • For those with liquidity and guts, 42 42 40 40 oil tankers could be a place to 38 38 35 35 hide. 33 33 32 32 30 30 28 28 27 27 25 25 24 Source: U.S. Energy Information Administration 24 • Watch contango indicator, ATR, 14-Day RSI 80 80 and Energy Trend Model for signs 70 70 stress is receding. 60 60 50 50 40 40 30 30 20 20 In January, we downgraded oil from bullish to Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 2016 2017 2018 2019 2020 neutral. On March 9, we moved to a bearish com3025Brent © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html position. What happened? On Friday, March For data vendor disclaimers refer to www.ndr.com/vendorinfo/ 6, OPEC+ decided to hold hands and jump to their deaths. Entering the week, everyone (current production is 9.7 mmbpd). The of stated OPEC policy, oil prices are headed assumed a large production cut would Kingdom also slashed official selling prices back to their 2016 lows ($26 Brent) and likely come from the OPEC+ meeting. However, (OSP) for Arab Light crude oil to northwest lower (chart above). Logic dictates we at the last minute, Russia balked at cutting Europe by $8 per barrel…undercutting the downgrade oil from neutral to bearish. production further. As a result, the OPEC+ price of Brent by ~$10 and Urals (Russia’s This could be a short-term downgrade. alliance (functionally Russia + Saudi Arabia) benchmark) by ~$8. When futures opened formed in 2016 to stabilize the oil market is on Sunday evening, Brent crude traded into Sub-$40 oil works for no one no more. Leaving the meeting Friday, Russian the low-$30s. The price war is now official. Whether we are discussing U.S. shale, Oil Minister Alexander Novak summed up Saudi Arabia, or Russia, sub-$40 oil the new OPEC+ policy: “Everyone is free to In a normal economic environment, OPEC works for no one. And, any long-term pump-at-will from April 1.” discord is enough to crash oil prices. An OPEC bearish oil forecast relies heavily on U.S. price war occurring in the midst of a global production growing steadily. KSA responded by leaking to the press demand shock (i.e. the coronavirus outbreak) that it was prepared to boost production is completely unprecedented. We are in We remain skeptical that is possible without to 11 million barrels per day by next month unchartered territory. Thus, without a reversal higher prices.

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Saudi Arabia cannot handle low oil. Oil tankers: Maybe the best place to hide Tanker Stocks Following 2014 OPEC Debacle Daily Data 2014-11-28 to 2015-12-30 Assuming 10 million bpd production, Saudi’s 190.0 190.0 187.5 Shipper Stock Performance 187.5 2020 budget needs roughly $60 per barrel 185.0 Tanker Type Performance 185.0 182.5 182.5 Oil Tankers ( ) 67% to bring in the budgeted oil revenue. The 180.0 180.0 177.5 177.5 Saudi’s cannot withstand another two year 175.0 175.0 172.5 172.5 period like 2014-2016. 170.0 170.0 167.5 167.5 165.0 165.0 162.5 162.5 Is there a place to hide right 160.0 160.0 157.5 157.5 now? 155.0 155.0 152.5 152.5 For investors with liquidity and guts, 150.0 150.0 147.5 147.5 oil tankers should do well. The plunge 145.0 145.0 142.5 142.5 in oil prices is likely to send futures curves 140.0 140.0 137.5 137.5 across the petroleum complex into steep 135.0 135.0 132.5 132.5 contango. Following the last OPEC debacle 130.0 130.0 127.5 127.5 in November of 2014, a portfolio of oil 125.0 125.0 122.5 122.5 tankers returned 65% the following year 120.0 120.0 117.5 117.5 115.0 115.0 (chart, right). 112.5 112.5 110.0 110.0 107.5 107.5 105.0 105.0 102.5 102.5 100.0 *Portfolios equal-weighted, rebalanced quarterly, total return. Allocated to 100 on 2014-12-31. 100.0 01 10 19 31 12 22 02 11 23 04 13 24 02 14 23 04 13 22 03 12 23 02 14 23 03 12 21 01 11 22 01 12 21 30 10 19 01 10 21 31 Dec '14 Jan '15 Feb '15 Mar '15 Apr '15 May '15 Jun '15 Jul '15 Aug '15 Sep '15 Oct '15 Nov '15Dec '15 tankerPortfolios4 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Curve should slip into super contango What to watch for Energy Crude Oil - Futures Curve (Contango Steepening vs. Flattening) Daily Data 1986-07-30 to 2020-03-06 equities 132.5 Crude Oil (WTI) - 12-Month Strip/Spot (21-Day SMA) 132.5

130.0 Stats Since 1986 130.0 Obviously, a weight-of-the-evidence Oil Performance When % Gain/ % of 127.5 Futures Curve Is: Annum Time 127.5 approach will be paramount. However, there * In Contango & Steepening -9.03 23.65 125.0 In Contango & Flattening 16.21 22.79 125.0 are three charts our clients should watch in Backwardation 3.86 53.56 122.5 122.5 particular: 120.0 120.0 1. Contango indicator (chart, left) 117.5 117.5

115.0 115.0 2. Average True Range indicator

112.5 112.5 3. Energy Trend Model

110.0 110.0 107.5 107.5 Above excerpted from: “Energy 105.0 105.0 Armageddon” by Warren Pies, March 9, 102.5 102.5

100.0 100.0 2020 (available through the Energy Strategy

97.5 97.5 add-on product offering)

95.0 95.0

92.5 92.5

90.0 90.0

87.5 87.5

85.0 85.0

82.5 82.5 *Above 100 indicates a market in contango. 80.0 Source: Bloomberg Finance L.P., U.S. Energy Information Administration Below 100 indicates a market in backwardation. 80.0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 COM3023C © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

PERIODICAL | ISSUE: #MKTDG20200316 | NDR.COM Please see important disclosures at the end of this report. MARCH 16, 2020 12 MARKET DIGEST GLOBAL ECONOMICS

ALEJANDRA GRINDAL SENIOR INTERNATIONAL ECONOMIST PATRICK AYERS INTERNATIONAL ECONOMIC ANALYST

MARCH 16, 2020

Global PMI clobbered by coronavirus

Global PMI indicates sharp showdown in global activity Monthly 3/31/1998 - 4/30/2020 Key Takeaways Global Industrial Production vs Global Manufacturing PMI 10 Industrial Production 57 Year-to-Year Change 9 12/31/2019 = 0.5% 56 8 Scale Left () 55 • Global manufacturing activity 7 54 6 plunged to a 10-year low, but 5 53 readings are still not consistent 4 52 with deep global recession. 3 51 2 50 1 49 0 48 • Global breadth held up, as most of -1 47 -2 the damage was concentrated in 46 -3 45 China. -4 Purchasing Managers' Index 44 -5 (Moved Ahead Two Months) Scale Right 43 -6 () • Some evidence suggests that the -7 42 slowdown in China may be short- -8 41 -9 lived, which argues for a rebound 40 -10 39 -11 in activity. Shaded Areas Represent 38 -12 Contractions Based on Peaks and Troughs of OECD Reference Series 37 -13 36 -14 35 -15 Global manufacturing suffered its worst -16 Source: Haver Analytics Correlation Coefficient = 0.86 34 contraction in February in over ten years (IE250C) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. as the coronavirus (COVID-19) outbreak See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. wreaked havoc on the Chinese economy. The global PMI slumped 3.2 points, the global economy has contracted since 1980. Breadth only falls slightly most since November 2008, right after February’s data is also well above the post Despite the large slump in the global Lehman collapsed, to 47.2, the lowest since September 11, 2001 reading of 41.0, when aggregate PMI, our measures of global May 2009. global GDP grew about 2.5%. breadth only fell slightly. The share of countries with expanding manufacturing The current reading in the PMI is If February reflects the worst of the health industries is still near its best level since consistent with a 1.0% annual decline in crisis, the impact on global growth may early 2019. Our measure of monthly global industrial production (chart above). not be as detrimental. Additionally, prior breadth also fell, but remained in expansion If realized, this would be the largest fall to the outbreak, the global economy was territory. since October 2009, when production was already building the case for a recovery. plunging at over a 3% pace. Notably, the global manufacturing PMI had Above excerpted from: “Coronavirus increased for five of six months after falling clobbers global manufacturing” by Alejandra Despite the low reading in the PMI, it almost exclusively since the beginning of Grindal, March 3, 2019 (available through remains significantly above its record low 2018. NDR’s Institutional product offerings) reading of 33.8 in 2009, the only year the

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All about China China’s PMIs plunged in February Prior to the COVID-19 outbreak, the Chinese China CFLP PMI vs. Markit Manufacturing PMI Monthly Data 2007-01-31 to 2020-02-29 Markit Manufacturing PMI (2020-02-29 = 40.3) economy was already on the mend, thanks CFLP Manufacturing PMI (2020-02-29 = 35.7) 58.0 58.0 to the easing of trade tensions with the U.S. 56.0 56.0 and monetary and fiscal stimulus. But that 54.0 54.0 52.0 52.0 came to a bitter end this year as COVID-19 50.0 50.0 48.0 48.0 essentially put the economy into standstill 46.0 46.0 for a large part of the first quarter. 44.0 44.0 42.0 42.0 40.0 40.0 38.0 38.0 The data for February was absolutely devas- 36.0 36.0 34.0 Source: Haver Analytics 34.0 tating. Both the manufacturing and services Markit Services PMI (2020-02-29 = 26.5) PMIs plunged into uncharted territory, consis- China CFLP Services PMI (2020-02-29 = 29.6) 60 60 tent with sharp declines in economic activity 55 55 (chart, right). China has not officially been 50 50 in recession since 1989. Whether the current 45 45 situation constitutes a recession depends on 40 40 the longevity of the slowdown. 35 35

30 30

25 Source: Haver Analytics 25 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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China’s new cases of Covid-19 have slowed Some evidence suggests that the slowdown Global Cumulative Confirmed COVID-19 Cases, Recoveries and Deaths Daily Data 2020-01-21 to 2020-03-12 Global Cumulative Confirmed Cases (2020-03-12 = 128343) may be short-lived, which argues for a re- China Cumulative Confirmed Cases (2020-03-12 = 80793) bound in activity. 120,000 120,000 100,000 100,000 80,000 80,000 The pace of new COVID-19 cases in China 60,000 60,000 40,000 40,000 has slowed significantly (chart, left). Accord- 20,000 20,000 0 0 ing to John Hopkins University data, since the Source: Haver Analytics Cumulative Recoveries (2020-03-12 = 68324) beginning of March, new cases in China have China Cumulative Recoveries (2020-03-12 = 62824) grown at no more than 200 per day. 60,000 60,000 50,000 50,000 40,000 40,000 This compares to the rest of the world which 30,000 30,000 20,000 20,000 has seen cases grow by the thousands on a 10,000 10,000 0 0 daily basis. Furthermore, about three-quarters Source: Haver Analytics Cumulative Deaths (2020-03-12 = 4720) of those in China who have been diagnosed China Cumulative Deaths (2020-03-12 = 3169) have also recovered from the disease. 4,000 4,000

3,000 3,000

2,000 2,000

1,000 1,000

0 0 Source: Haver Analytics 21 22 23 24 27 28 29 30 31 3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28 2 3 4 5 6 9 10 11 12 Feb 2020 Mar 2020

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As a result, production is reportedly getting linked to China’s economy are in Asia — nota- Q4 due to a sales tax hike and typhoon, are in back on line. According to the China bly Taiwan, South Korea, Japan, and Malaysia. recession. Economic Recovery Index, a GDP-weighted measure of mobility data, 70% of the economy Even if China and Asia recover, the rest of If the global pandemic is not contained, China was up and running as of March 9. But this the world could still be in peril, dragging could also be subject to a second round of doesn’t mean all is clear for China, as there are Asia down with it (chart below). Many of the outbreak. It’s been found that those who a range of positive and negative scenarios. the world’s largest economies are likely still suffer from the virus and recover, could still early on in the spread of the virus. Several get it again. If the Chinese economy is truly rebounding and large European countries have cases in the new cases of the virus ebb, not only will Chi- thousands, led by Italy, which alone has over Above excerpted from: “How much will nese growth pick up, but so will growth in other 12,000. It’s highly likely that the eurozone, as China slow due to Covid-19?” by Alejandra parts of the world. The economies most closely well as Japan, whose economy contracted in Grindal, March 12, 2020 (available through NDR’s Institutional product offerings)

When China slows, the rest of Asia slows too Manufacturing Purchasing Managers' Indexes (PMI) Monthly Data 2001-10-31 to 2020-02-29 75.0 75.0 China (Markit) 2020-02-29 = 40.3 Japan 2020-02-29 = 47.8 South Korea 2020-02-29 = 48.7 Taiwan 2020-02-29 = 49.9 72.5 72.5

70.0 70.0

67.5 67.5

65.0 65.0

62.5 62.5

60.0 60.0

57.5 57.5

55.0 55.0

52.5 52.5

50.0 50.0

47.5 47.5

45.0 45.0

42.5 42.5

40.0 40.0

37.5 37.5

35.0 35.0

32.5 32.5

30.0 30.0

27.5 27.5

25.0 25.0

22.5 22.5 Data Range (years): 20.0 20.0 1 2 3 5 10 Max Source: Haver Analytics

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ICS_212.RPT © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

PERIODICAL | ISSUE: #MKTDG20200316 | NDR.COM Please see important disclosures at the end of this report. MARCH 16, 2020 15 MARKET DIGEST U.S. FIXED INCOME

JOSEPH F. KALISH CHIEF GLOBAL MACRO STRATEGIST VENETA DIMITROVA SENIOR U.S. ECONOMIST

MARCH 16, 2020

De-risking within fixed income

IG uptrend line broken Bond Sector Performance Relative to the Float Adjusted U.S. Aggregate (Daily) Daily Data 2019-03-04 to 2020-03-04 Key Takeaways Treasurys / Aggregate (2020-03-04 = 92.18) 92.0 92.0

91.5 91.5

• We downgraded credit, MBS, 91.0 91.0 Source: Bloomberg Barclays Indices CMBS, ABS and EM (USD) bonds to Agencies / Aggregate (2020-03-04 = 85.54) 88 88 underweight. 87 87

86 86

Source: Bloomberg Barclays Indices • Increased U.S. bond duration to Mortgage Backed Securities/Aggregate (2020-03-04 = 90.21) 94 94 110% from 100%, as Germany is on 93 93 92 92 the cusp of confirming a global yield 91 91 90 Source: Bloomberg Barclays Indices 90 downtrend. Commercial Mortgage-Backed Securities/Aggregate (2020-03-04 = 132.95)

135 135 134 134 • We increased exposure to the U.K. 133 133 132 Source: Bloomberg Barclays Indices 132 and Europe at the expense of Japan Corporates/Aggregate (2020-03-04 = 124.72)

and remain overweight the U.S. 124 124

122 122

120 Source: Bloomberg Barclays Indices 120 1 15 1 15 1 15 3 17 1 16 1 15 3 17 1 15 1 15 2 16 2 16 3 20 2 On March 5, we made several position chang- Mar 2019 Apr 2019 May 2019 Jun 2019 Jul 2019 Aug 2019 Sep 2019 Oct 2019 Nov 2019 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Traditional U.S. Aggregate used prior to June 2009 es in both the U.S. and globally in light of re- Customized version of B196D © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. cent market developments — we downgraded For data vendor disclaimers refer to www.ndr.com/vendorinfo/ credit, MBS, CMBS, and ABS to underweight. Within high yield, the Caa/Ba ratio was plunging despite an improving economic outlook at We downgraded investment grade credit to new lows. Downside relative momentum was the time, I was “hesitant to upgrade high yield to underweight from marketweight, joining accelerating, especially for high yield. due to valuation concerns and some deteri- our underweight on high yield. The change oration in corporate fundamentals.” We were was primarily driven by technicals, market Market volatility skyrocketed — a negative “concerned that the credit cushion is being volatility, and valuation risk. We recommend- condition for credit, particularly for high yield. eroded, and that our ability to withstand a ed moving up in quality. We continue to avoid Quality is outperforming. Many strategists downside shock is being reduced.” We are leveraged loans. pointed to the stresses in energy to explain seeing the consequences of that eroded rising credit spreads. Our concern was broad- cushion playing out today. And cash levels Credit technicals are terrible er than energy and we saw further room for at funds were not particularly high going into The break of the investment grade uptrend line spread widening. The market is still not yet at this shock. Finally, selection and diversification is potentially serious (chart above), consid- levels we would deem attractive/cheap. have been no panacea. Although there are ering that spreads remain historically low. We differences in sector performance, in severe respected the break. Within investment grade, Valuation and credit concerns market declines, everything gets sold and the Baa/Aa ratio had started to break down. In our High Yield and Credit Outlook for 2020, correlations go to 1.00.

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Downgraded MBS Spreads have room to widen OAS* on Corporates, High Yield, Mortgages, and Agencies Daily Data 2015-03-04 to 2020-03-04 We also downgraded mortgage-backed U.S. Investment-Grade Corporate Credit (2020-03-04 = 124.0 Basis Points)

+1 SD securities (MBS) to underweight from 200 200 180 180 overweight. With mortgage rates dropping to 160 160 140 140 record lows, every mortgage holder in Amer- Mean 120 120 ica who can will refinance their mortgage, 100 100 80 80 resulting in a spike in prepayments. 60 -1 SD Mean = 156.8 Source: Bloomberg Barclays Indices 60 U.S. High Yield (2020-03-04 = 464.4 Basis Points)

800 +1 SD 800

Spreads have room to widen (chart, right). 700 700 Treasurys and other high quality sovereign 600 600 Mean debt are the beneficiaries. 500 500 400 400

300 -1 SD 300 Mean = 545.5 Source: Bloomberg Barclays Indices Mortgage-Backed Securities (2020-03-04 = 59.6 Basis Points) Mean

50 50

40 40

30 -1 SD 30

20 20

10 10 Mean = 49.7 Source: Bloomberg Barclays Indices Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2016 2017 2018 2019 2020

*OAS = Option-Adjusted Spread

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EM spread could widen to around 500 Downgraded EM Barclays Emerging Markets (USD) Yield and Spread Daily Data 1997-01-29 to 2020-03-04 Barclays Emerging Markets Blended Yield* (2020-03-04 = 4.58%) Although Fed rate cuts and a weaker U.S. U.S. 10-Year Treasury Yield (2020-03-04 = 1.02%) dollar could help dollar-denominated debtors, 16.0 16.0 the demand and supply shocks could result in 14.0 14.0

12.0 12.0 a shortage of dollars. Spreads could widen to 10.0 10.0 around 500 (chart, left). 8.0 8.0

6.0 6.0

4.0 4.0 Additionally, we have been bothered by the 2.0 2.0 renewed stress in repo and money mar- 0.0 Source: Bloomberg Barclays Indices, Federal Reserve Board 0.0 kets. Term repo has been oversubscribed Barclays Emerging Markets Spread (2020-03-04 = 359 bps) Emerging Markets Debt Relatively Cheap 1,200 1,200 since early February. We saw demand for 1,100 1,100 1,000 1,000 overnight funding oversubscribed and strong 900 900 demand recently. 800 800 700 700 600 600 500 500 Mean = 409 bps 400 400 300 300 200 200

100 Emerging Markets Debt Relatively Expensive Source: Bloomberg Barclays Indices 100 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

* Blended indicates that all cash flows are treated equally, with no separation of cash flows that are guaranteed by collateral from those that are not.

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Global confirmation ahead? Increased duration Daily 1/02/2013 - 3/04/2020 Last November, we moved to 100% of U.S. Yields on Key 10-Year Governments 3.2 Bond Yields 3/04/2020 3.2 benchmark duration when 10-year Treasury 3.1 Country Yield (%) 3.1 3.0 U.S. () 1. 02 3.0 2.9 U.K. () 0. 37 2.9 yields were hovering around 1.7%. With the 2.8 Germany () -0. 64 2.8 2.7 Japan () -0. 13 2.7 10-year Treasury yield below 1%, we increased 2.6 2.6 2.5 2.5 our U.S. bond duration to 110% from 100%, 2.4 2.4 2.3 2.3 2.2 2.2 as the demand for safe, long duration assets 2.1 2.1 2.0 2.0 continues. The Fed could soon be revisiting 1.9 1.9 1.8 1.8 the zero lower bound. A resumption of QE 1.7 1.7 1.6 1.6 1.5 1.5 could follow, which could nullify the historical 1.4 1.4 1.3 1.3 tendency for the curve to steepen following 1.2 1.2 1.1 1.1 intermeeting rate cuts. We are staying neutral 1.0 1.0 0.9 0.9 0.8 0.8 for now. Additionally, new lows in German 0.7 0.7 0.6 0.6 yields would confirm the global bond bull 0.5 0.5 0.4 0.4 market (chart, right). 0.3 0.3 0.2 0.2 0.1 0.1 0.0 0.0 -0.1 -0.1 Reduced Japan, lifted U.K. and -0.2 Correlation Matrix Yield Curve Control Target Range -0.2 -0.3 U.S. U.K. GER JAP -0.3 -0.4 U.S. 1.00 -0.4 Europe -0.5 U.K. 0.48 1.00 -0.5 GER 0.47 0.93 1.00 Bunds close to -0.6 JAP 0.30 0.90 0.92 1.00 -0.6 Moreover, we have been bothered that the -0.7 -0.7 Source: Bloomberg L.P. confirming drop in Treasury yields had not been con- J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J M (B190) 2013 2014 2015 2016 2017 2018 2019 2020 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. firmed elsewhere. Gilts have since confirmed, See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. and bunds are within a few basis points of

Reducing Japan, raising U.K., Europe doing so. Only Japan remains in its own world Relative Total Return Ratios of Major Bond Markets I (in hedged USD) Daily Data 2017-03-06 to 2020-03-04 JP/EU Total-Return Ratio (2020-03-04 = 75.96) of yield curve control. As a result, we went

81.3 81.3 further underweight Japan (10% allocation vs. 80.4 80.4 15%). We increased the U.K. allocation to 8% 79.4 79.4 78.5 78.5 from 5% (now overweight), and increased the 77.6 77.6 Europe allocation to 27% from 25% (still mar- 76.7 76.7 ketweight) Return trends support our move 75.9 75.9 Source: Bloomberg Barclays Indices UK/EU Total-Return Ratio (2020-03-04 = 96.89) (chart, left). The U.S. remains overweight at

97.7 97.7 55%. 96.6 96.6 What if we’re wrong? 95.5 95.5 We think it is prudent to de-risk, consider- 94.4 94.4 ing that valuations are not attractive and 93.3 Source: Bloomberg Barclays Indices 93.3 UK/JP Total-Return Ratio (2020-03-04 = 127.55) uncertainty is likely to be with us for a while. 127.4 127.4 125.9 125.9 But if infection rates start to subside and 124.5 124.5 government support packages proliferate, we 123.0 123.0 121.6 121.6 will have no problem reversing some, or all, of 120.2 120.2 118.9 118.9 these positions. 117.5 117.5 116.1 116.1 Source: Bloomberg Barclays Indices Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Above excerpted from: “De-risking?” by Jo- 2018 2019 2020

B1010 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior seph Kalish, March 5, 2020 (available through permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/ NDR’s Institutional product offerings)

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Policy responses The Fed will also buy $500 billion of Trea- corporates, municipalities, or EM. The Fed is The Fed made two intermeeting cuts. First, on sury securities and $200 billion of mort- not out of ammunition, but its weapons won’t March 3, the Fed lowered the target range for gage-backed securities. It will also do $500 win the war against the virus. the fed funds rate by 50 basis points (0.5%) billion in unscheduled overnight repo. to 1.00% to 1.25%. Second, on March 15, the Fiscal support, particularly to help SMEs Fed slashed the target range for the fed funds We looked at the performance of 10-year (small and medium-sized enterprises), rate by 100 bp back to the zero lower bound Treasury yields, the yield curve, and credit is what will be needed to weather the (ZLB) of 0.00 to 0.25% for the first time since spreads. Historically, 10-year yields were lower economic storm now swirling around the December 15, 2015. It plans to maintain this one year later (chart below). The yield curve country. range until it is “confident that the economy steepened. has weathered recent events and is on track Above excerpted from: “What the inter- to achieve” its goals. These actions won’t narrow credit spreads for meeting cut means” and “Fed fires bazooka

Yields tend to drift lower after intermeeting cuts 10-Year Treasury Note Yield Performance Around Intermeeting Fed Rate Cuts In Basis Points Daily Data Starting in 1991 104 12 Months = 252 Market Days 104 100 100 96 96 92 92 88 88 84 84 80 80 76 76 72 72 68 68 64 64 60 60 56 56 52 52 48 48 44 Intermeeting Rate Cut 44 40 By Federal Reserve 40 36 36 32 32 28 28 24 24 20 20 16 16 12 12 8 8 4 4 0 Fed Easing Yield Change (bp) Yield Change (bp) 0 -4 Date of Cut 126 Days Later 252 Days Later -4 -8 02/01/1991 15 -60 -8 04/30/1991 -37 -45 -12 09/13/1991 5 -129 -12 -16 10/15/1998 60 151 -16 -20 01/03/2001 30 -4 -20 04/18/2001 -51 -3 -24 09/17/2001 70 -76 -24 -28 08/17/2007 -79 -86 -28 01/22/2008 62 -96 -32 10/08/2008 -76 -45 -32 -36 Mean -0 -39 -36 -40 -40 Source: Federal Reserve -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 (B598C) <--- Months Before Peaks ---> <--- Months After Peaks ---> © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

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but virus still standing” by Joseph Kalish, on December Recession risk and when to turn 1990. Since OAS history is limited, we also March 3, 2020 and March 16, 2020, respec- bullish Spreads have been wider at prior looked at the Baa/Aaa spread going back tively (available through NDR’s Institutional stress points lows, based on monthly indexes. to the 1920s. The average spread peaked product offerings) In Japan,, activity plunged 8.4% from February around 200 basis points (2%). On Friday, to April. With travel, restaurants, entertain- March 6, it closed at 120, also suggesting Many clients are asking whether the U.S. econ- ment, and schools shutting down, we could further downside risk. omy is heading toward recession. The National meet the “significant decline” definition. But Bureau of Economic Research (NBER), the we don’t know if we will meet the time criteria. Except for 1945 and 2001, Baa/Aaa credit official arbiters of the U.S. business cycle dating, spreads widened from the beginning of the defines a recession as: “a significant decline in What matters is what the markets are pricing recession to its peak by a median of 50 basis economic activity spread across the econo- in. As of March 9, the S&P 500 was down points. We may not have seen peak spreads. my, lasting more than a few months, normally 18.9% from its peak. There have only been visible in real GDP, real income, employment, in- five other declines of less than 20%, which re- We are watching three things to turn more dustrial production, and wholesale-retail sales.” sulted in a recession. The median decline re- constructive on credit and risk more generally: sulting in recession was 35.9%, while the medi- 1) cheap valuation (IG spreads closer to 200 Our Chief Global Macro Strategist has been an non-recessionary bear was 23.3%. Both and HY spreads over 800); 2) fiscal policy; using two analogs for COVID-19: the 9/11 suggest further downside risk. and 3) a slowing of virus transmissions. terrorist attacks and the March 2011 Japanese tsunami. In both cases, economic activity As for credit, on March 9, investment grade Above excerpted from: “Recession risk and appeared to stop for a period of time. After option-adjusted spread (OAS) was 171, while when to turn bullish” by Joe Kalish, March 10, 9/11, U.S. economic activity fell by around 0.5% high yield was 642 (chart below). Both were 2020 (available through NDR’s Institutional (2.0% SAAR) from August to the November/ well below all prior meaningful peaks since product offerings)

Spreads have room to widen OAS* on Corporates, High Yield, Mortgages, and Agencies Daily Data 2015-03-04 to 2020-03-04 U.S. Investment-Grade Corporate Credit (2020-03-04 = 124.0 Basis Points)

+1 SD 200 200 180 180 160 160 140 140 Mean 120 120 100 100 80 80

60 -1 SD Mean = 156.8 Source: Bloomberg Barclays Indices 60 U.S. High Yield (2020-03-04 = 464.4 Basis Points)

800 +1 SD 800

700 700

600 600 Mean 500 500

400 400

300 -1 SD 300 Mean = 545.5 Source: Bloomberg Barclays Indices Mortgage-Backed Securities (2020-03-04 = 59.6 Basis Points) Mean

50 50

40 40

30 -1 SD 30

20 20

10 10 Mean = 49.7 Source: Bloomberg Barclays Indices Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2016 2017 2018 2019 2020

*OAS = Option-Adjusted Spread

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VENETA DIMITROVA SENIOR U.S. ECONOMIST JOSEPH F. KALISH CHIEF GLOBAL MACRO STRATEGIST

MARCH 16, 2020

Is the U.S. economy immune to COVID-19?

No widespread signs of recession yet Key Takeaways U.S. Recession Watch Report Escape Key Recession Current Indicator Velocity Level Level Level Date • COVID-19 is both a supply and a E NDR Recession Probability Model 5 50 4.4 2019-12-31 demand shock to the economy that will likely lead to slower growth and Breadth of Philly Fed State Leading Indexes 95 70 88 2019-12-31 lower inflation in the short-run. NDR Economic Timing Model 17 0 23 2020-01-31 • While the fallout from the virus NDR Composite Leading Index 3.4 -2.6 0.2 2020-01-31 raises the odds of recession, there National Financial Conditions Index -0.7 0.9 -0.8 2020-02-21 aren’t yet widespread signs of one Initial Claims for Unemployment Insurance 350 500 209.8 2020-02-21 in leading indicators. (4-wk Avg) • Positive consumer fundamentals, Conference Board's Consumer Confidence 98.2 63.2 130.7 2020-02-29 housing market momentum, Index monetary and possibly fiscal Conference Board's CEO Confidence Index 61 43 43 2019-12-31 stimulus provide offsets to a fallout from the virus. ISM Manufacturing Index 55.0 48.0 50.1 2020-02-29 ISM Non-Manufacturing Index 55.2 51.4 55.5 2020-01-31 Source: Ned Davis Research, Inc., Federal Reserve Bank of Chicago, Federal Reserve Bank of Philadelphia, Since financial markets are forward looking, Haver Analytics, The Conference Board. Indicators which have reached their escape velocity level are highlighted green. Indicators which have reached their key recession level are highlighted red. their collective wisdom would suggest a fallout for the U.S. economy, possibly even Ned Davis Research, Inc. ECON_20.RPT a recession. But economic data is typical- ly released with a lag, making an accurate There are several important channels liquidity assessment of the economic impact from the through which the novel virus could infect • Fiscal stimulus and automatic stabilizers virus nearly impossible at this time. Neverthe- the U.S. economy: less, it is important to keep current events in • Supply chain disruptions Given what little we know about the initial perspective and evaluate both the downside • Operating capital/liquidity shortage economic impact of the virus in the U.S., we and upside risks to the economic outlook. • Weaker export demand will keep intense focus on leading indicators • Negative stock market wealth effect for early signs of trouble. For now, all but one While the risk for growth is clearly to of the ten key indicators in our Recession the downside, recession is not a forgone But there are also several important offsets: Watch Report point to continued expansion conclusion. The U.S. economy is well posi- • Consumers working, earning, and ahead (table above). tioned to withstand the shock, with positive saving more offsets stemming from a robust labor mar- • Stronger household balance sheets Above excerpted from: “Is the U.S. ket, strengthening housing market activity, • Housing market activity in an upswing economy immune to Covid-19?” by Veneta and easy monetary and fiscal policies. • Lower energy prices Dimitrova, March 3, 2020 (available through • The Fed stands ready to provide ample NDR’s Institutional product offerings)

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Sinking oil prices = sinking 24 months from peak to trough in mining President Trump announced discussions economy? payrolls. This means that a potential mining of a payrolls tax cut, aid for hourly workers The sharp drop in oil prices this week comes payrolls correction could span the rest of and those who lack paid sick leave, and help amid a growing number of COVID-19 cases 2020 and extend into 2021. This may make for the hardest hit industries. This could in the U.S. and globally and rising fear of an the payrolls and economic recovery from cushion the economic blow from COVID-19 economic fallout from the virus. The first COVID-19 slower than it would have been and a shrinking mining sector. association with falling oil prices is that they otherwise. Still, a U.S. recession call at this would support more consumer discretionary time would be premature. Above excerpted from: “Sinking oil prices spending, lower production costs in many = sinking economy?” by Veneta Dimitrova, industries, lower inflation, and lower inflation There isn’t yet real economic data that March 10, 2020 (available through NDR’s expectations. The positive impact, however, reflects widespread damage from COVID-19. Institutional product offerings) will be reduced by the potential downsizing But, the steep correction in risk asset prices of the mining sector, as less efficient and/ suggests that financial markets expect or highly leveraged firms exit the field and slower economic growth ahead. One of the mining payrolls decline. History is a guide backstops will be effective monetary and with respect to the latter. fiscal stimulus, a necessary condition for a more constructive outlook. The table below shows how mining payrolls changed during eight severe oil price drops The Fed was poised to cut rates again since 1983. We find that mining payrolls and provide more liquidity, following its declined a median of 92,000, or 12.6%, intermeeting emergency rate cut in March around these events, and took a median of (see Policy responses on page 19).. And

Oil price drops lead to mining job losses Mining and Logging Payrolls Around Major Oil Price Declines Job Loss From Peak Payrolls Peak Payrolls Trough to Trough # Months Average Job Oil Price Peak to Loss Per Decline Date ('000) Date ('000) ('000) (%) Trough Month ('000) 1986 August 1984 1027 February 1987 759 -268 -26.1 30 -9

1988 October 1987 784 July 1989 730 -54 -6.9 21 -3

1991 May 1990 770 August 1993 656 -114 -14.8 39 -3

1994 December 1993 673 January 1996 633 -40 -5.9 25 -2

1998 January 1998 660 September 1999 591 -69 -10.5 20 -3

2001 June 2001 610 April 2003 566 -44 -7.2 22 -2

2008 September 2008 782 October 2009 661 -121 -15.5 13 -9

2015 September 2014 903 October 2016 644 -259 -28.7 25 -10

Median -92 -12.6 24 -3 Source: Bureau of Labor Statistics, NDR Ned Davis Research T_BEC_O202003101.1

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Jobs outlook is deteriorating The Conference Board’s Employment the negative impact on labor markets Nonfarm payrolls increased 273,000 Trends Index (ETI) fell 0.8% in February will be limited. But if the outbreak affects in February, about 100,000 more than and was off 1.3% from a year ago(chart, the economy through the summer, then expected. The unemployment rate slipped below), indicating some deterioration in the layoffs are more likely, particularly in travel, from 3.6% to 3.5%, matching the consensus, labor market outlook even before the wider entertainment, lodging, food, and hospitality and returning to the lowest level since 1969. spread of coronavirus fears in the U.S. The — especially of less skilled workers. The labor market was in excellent shape report stressed the point that the COVID-19 before fear of COVID-19 started taking over. outbreak has created great uncertainty for Above excerpted from: “Can a tiny virus It is now old news and has little bearing the labor market outlook. stop a steamroller?” and “Employment trends on the outlook for the U.S. economy and deteriorate” by Veneta Dimitrova, March 6 monetary policy. If the outbreak is contained and economic and 9, 2020, respectively (available through activity normalizes by April or May, then NDR’s Institutional product offerings)

Oil price drops lead to mining job losses Monthly 11/30/1973 - 2/29/2020 (Log Scale) Employment Trends Index 106 106 98 98 90 90 83 83 76 76 70 70 64 64 59 59 54 54 50 50 46 46 42 42 39 Source: The Conference Board Employment Trends Index (ETI)(tm) 39 Monthly % Change 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4

Year-to-Year Change 20 20 16 Labor Markets 16 Improving 12 12 8 8 4 4 0 0 -4 -4 -8 -8 Labor Markets -12 Weakening -12 -16 Shaded areas represent -16 National Bureau of -20 Economic Research recessions -20

(E103B) 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

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NED DAVIS SENIOR INVESTMENT STRATEGIST

MARCH 16, 2020

Trading strategy more cautious

Fab Five Tape now bearish, although overall model is neutral S&P 500 Index vs. The Fab Five Tape Component Daily Data 1981-12-31 to 2020-03-11 Key Takeaways S&P 500 Index (2020-03-11 = 2,741.38) 2,512 2,512

1,585 1,585 • Fed plus Tape combination 1,000 1,000 indicator and supply vs. demand 631 631 398 398

both flashed bearish signals. 251 251

158 158

100 100 Source: S&P Dow Jones Indices Fab Five Tape Composite Model (2020-03-11 = -3.00) • While the Fab Five Model is 6.0 6.0 neutral, the Fab Five Tape 4.0 4.0 2.0 2.0 Component is now bearish. 0.0 0.0

-2.0 -2.0

-4.0 -4.0

-6.0 -6.0 • As a result, my hedge fund Source: Ned Davis Research, Inc. 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 strategy leans cautious.

S&P 500 Index Performance Model Reading Model Reading Model Model Full History: 1981-12-31 to 2020-03-11 (As of 2020-03-11) (As of 2020-03-11) Fab Five Tape Component % Gain/ % of DAVIS250 BEARISH S48 NEUTRAL is Annum Time DAVIS125 BEARISH S245 BEARISH Above 3.5 16.76 35.72 DAVIS47B BEARISH DAVIS128A BULLISH -1.5 - 3.5 9.64 52.20 Tape deteriorates DAVIS222 BEARISH S76 BULLISH Below -1.5 -16.70 12.08 Buy/Hold = 8.47% Gain/Annum

Our indicators that uses the rule, “Don’t fight DAVIS501 © Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. the tape or the Fed,” went negative after the For data vendor disclaimers refer to www.ndr.com/vendorinfo/ 2/28/2020 close. Trading strategy more two, 10-to-1 up days to restore some upside That was due to a tape sell signal, as the cautious momentum. S&P 500 Total Return Index fell below its However, given my strong longer-term 12-month moving average. This sends the concerns over debt and valuations, the Above excerpted from: “Fab Five Tape indicator into commercial paper. negative Fab Five Tape tilts my hedge turns bearish” by Ned Davis, March 9, 2020 fund trading strategy from neutral to (Ned’s Insights is available through NDR’s Additionally, NDR’s volume supply rose cautious. Advisory add-on product offerings) above volume demand on 3/5/2020. As I noted on our conference call last week, While the Fab Five itself is still at a neutral I continue to look for a selling climax low, reading, the Fab Five Tape Composite followed by a strong rally, then a test of the shown below went negative as well on selling climax low with many divergences 3/5/2020. and much less selling pressure.

This should be followed by one, or better yet

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Glossary of terms

Asset Allocation: Ned Davis Research, Inc. constrains the recommended equity weighting (which can theoretically range from zero to 100%) to be limited to a minimum of 40% stocks and a maximum of 70% stocks. Due to the constraint on equity weight- ing, the combination of bonds and cash can be weighted no greater than 60% and no less than 30% in NDR’s recommendations. The benchmark for bond allocation is 35% and for cash is 10%.

Benchmark Duration: The most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio should be to changes in interest rates. Point of reference for a measurement.

Beta: A number describing the relation of an investment return with that of the financial market as a whole. Numbers greater than one suggest an investment will increase more than the broad market when it is rising, and have greater declines when the market is falling.

Breadth: A technical term used to demonstrate how broadly a market is moving.

Capital Market: Is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds.

Commercial Mortgage-Backed Securities (CMBS): A type of mortgage-backed security backed by commercial mortgages rather than residential mortgages. When compared to a residential mortgage-backed security, a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term.

Core Inflation:Is a measure of inflation which excludes certain items that face volatile price movements, notably: food and energy.

Cyclical Bear: Cyclical swings in the market can last from several months to a few years, and are designed to be in line with the primary trend. A cyclical bear market is a cyclical swing when the market is in a downtrend.

Cyclical Bull: Cyclical swings in the market can last from several months to a few years, and are designed to be in line with the primary trend. A cyclical bull market is a cyclical swing when the market is in an uptrend.

Deflation: Is a slight decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls but stays above 0%.

Demographics: Studies of population based on factors such as age, race, sex, economic status, level of education, income level, and employment.

Echo Bull/Bear: An echo bear market is a shallower correction which occurs in the equity market that does not coincide with an economic recession. An echo bull market is one that follows and echo bear market.

European Central Bank (ECB): Is the institution of the European Union (EU) which administers the monetary policy of the EU Eurozone member states. It is thus one of the world’s most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany.

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Glossary of terms

Eurozone/European Union: Is an economic and monetary union (EMU) of the European Union (EU) member states which have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Federal Open Market Committee (FOMC): A component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations. It is the Federal Reserve committee that makes key decisions about in- terest rates and the growth of the United States money supply.

Gross Domestic Product (GDP): The total output of goods and services produced in a given country during a given period.

Lagging Indicator: An economic factor that changes after the economy has already begun to follow a particular pattern or trend; used to confirm long-term trends.

Leading Indicator: An economic factor that changes before the economy starts to follow a particular pattern or trend; used to predict changes in the economy.

Median P/E: Numeric value separating the higher half of a sample, a population, or a probability distribution, from the lower half. This is the middle price-to-earnings ratio of a series.

Mortgage-Backed Securities (MBS): A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency.

MSCI Emerging Market Index: An index developed by Morgan Stanley Capital International, Inc. (MSCI) as an equity benchmark for emerging market stock performance. It is a capitalization-weighted index that aims to capture 85% of publicly available total market capitalization. Component companies are adjusted for available float.

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NDR HOUSE VIEWS (Updated March 12, 2020)

NDR recommends an underweight allocation to equities. We Economic Summary March 16, 2020 are overweight bonds and underweight cash. When coronavirus worries start to subside and global economic activity starts returning to normal, we will likely see stock prices moving higher with rising bond yields. But there’s not yet any evidence that such a recovery is at hand. Global Economy U.S. Economy U.S. Inflation Below Trend At Trend Moderate (3.3%) (1.8%) (2.2%) Equity Allocation Overweight Marketweight Underweight

S We are marketweight the U.S. relative to other regions GLOBAL ASSET ALLOCATION Bonds (45%) but negative on an absolute basis. COVID-19 has driven the U.S. into a cyclical bear, but should create a buying opportunity Stocks (50%) | Cash (5%) later in the year. We favor large-caps over small-caps and Benchmark: Stocks (55%), Bonds (35%), Cash (10%) favor Growth over Value. E R R A

INTERNATINA We are marketweight all seven regions U.S. (55%) | Europe ex. U.K. (15%) | Emerging Markets (11%) Japan (7%) | U.K. (5%) | Canada (3%) | Pacific ex. Japan (4%) within our seven-way regional allocation framework.

Benchmark – U.S. (55.8%), Europe ex. U.K. (13.7%), Emerging Markets (11.8%), Japan (7.2%), U.K. (4.9%), Pacific ex. Japan (3.6%), Canada (3%) Macro G A ENM The global economy is in a sustained slowdown. U.S. (55%) | U.K. (8%) But recession probability for the U.S. remains minimal in the Europe (27%) Japan (10%) next six to nine months. Major risks include heightened trade Benchmark: U.S. (51%), Europe (26%), Japan (18%), U.K. (5%) war tensions, a sharp slowdown in China, and political U.S. ALLOCATION dysfunction in the U.S. and Europe. Bonds (45%) | Large-Cap | Growth Mid-Cap IED INME We are at 110% of benchmark duration. We Stocks (50%) | Cash (5%) | Small-Cap | Value are neutral on the yield curve. We are underweight credit, Benchmark: Stocks (55%), Bonds (35%), Cash (10%)

MBS, CMBS, and ABS. We are overweight Treasurys. S Health Care | Consumer Staples ENERG The combination of a demand shock (coronavirus) Energy | Industrials | Financials and an OPEC price war necessitate a bearish oil position. Those sectors with a benchmark weight > 9%, an overweight/underweight is more than +/- 300 basis points from the S&P 500 benchmark. For smaller sectors, the active bet is +/- 100 basis points. GD Long-term uptrend intact. We are bullish.

DAR Our models are mixed. S D

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