March 6, 2020

Market Pulse

Global Economy: The modest global uptick we envisioned for 2020 is at risk due to the coronavirus outbreak, though China is stepping up its monetary and fiscal support to sustain growth, and the lagged impact of central bank easing should help cushion the blow. While the US is also set to be impacted, our base case is the expansion should continue, albeit at a weaker pace.

Global Equities: We shifted our equity outlook from neutral back to more attractive in late February. Several of the concerns that caused us to downgrade our outlook have been alleviated following the sharpest market selloff from an all-time high in modern history. Consequently, the risk/reward appears to have improved. The market is now discounting some of the bad news, valuations have reset and many technical indicators are stretched to the downside. Also, with the sharp decline in rates, the S&P 500’s dividend yield is above that of the 30-year US Treasury rate for the first time since the financial crisis. Volatility is set to remain elevated near term following the correction.

Global Yields: The virus’s anticipated drag on near-term global growth is pulling domestic rates downward, weighing on our forward-looking US yield expectations. In response, in a rare intermeeting move, the Fed cut short-term rates by 50 basis points (0.50%). More rate cuts are likely. Accordingly, we have adjusted down our expected outlook for short- and long-term rates.

Positioning In Focus

US Large Caps — Pullback Represents an Opportunity

We still favor US large caps, which should continue to hold up better than most parts of the globe and have stronger earnings trends than other regions.

High Yield Spreads Widening an Opportunity

With high yield spreads widening, we believe this represents an opportunity for investors who are looking for an entry point given we still view recession risks as relatively low.

Monthly Spotlight

Technology’s Rise in Perspective

The tech sector has outperformed the S&P 500 Index by a wide margin over the last year. With four $1 trillion companies representing almost 17% of the S&P 500, some comparisons are being made to the technology bubble of the late 1990s.

While technology valuations and prices have became stretched from a short-term perspective and there are pockets of froth, conditions today are largely not comparable to the mania seen during the technology bubble. From a valuation standpoint, the technology sector recently traded at a trailing price-to-earnings (P/E) ratio of 27x, less than half of the March 2000 peak of 63x. Moreover, on a forward P/E basis, the premium tech stocks trade relative to the S&P 500 is now just reaching the low end of the prior range reached during the previous bull market cycle (2003-2007). The tech rally has been supported by strong fundamental earnings growth rather than the speculative excesses that we saw during the 2000 tech bubble. Tech sector earnings have grown 300% in the last 10 years, well ahead of the 215% earnings growth experienced by the S&P 500.

Technology’s Valuations Significantly Below Bubble Period

Asset Class View, Forecasts & Valuation*

We upgraded our short-term outlook on equities from neutral to more attractive in late February during the market selloff. Consequently, we also slightly lowered our cash outlook. While Treasury yields have gotten stretched on the downside, we expect ongoing volatility over the near term as investors seek safe-haven assets. Therefore, we have upgraded our US government outlook and lowered our outlook on MBS at this time.

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Asset classes are represented by the following indexes. An investment cannot be made directly into an index.

S&P 500 Index is comprised of 500 widely-held securities considered to be representative of the stock market in general.

Equity is represented by the MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*. With 2,757 constituents, the index covers approximately 85% of the global investable equity opportunity set

Fixed Income is represented by the Barclays Aggregate Index. The index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

Commodities are represented by the Bloomberg Commodity Index which is a composition of futures contracts on physical commodities. It currently includes a diversified mix of commodities in five sectors including energy, agriculture, industrial metals, precious metals and livestock. The weightings of the commodities are calculated in accordance with rules that ensure that the relative proportion of each of the underlying individual commodities reflects its global economic significance and market liquidity.

Cash is represented by the ICE BofAML US Treasury Bill 3 Month Index which is a subset of the ICE BofAML 0-1 Year US Treasury Index including all securities with a remaining term to final maturity less than 3 months.

US Large Cap Equity is represented by the S&P 500 Index which is an unmanaged index comprised of 500 widely-held securities considered to be representative of the stock market in general.

US Mid Cap is represented by the S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

US Small Cap Core Equity is represented by the Russell 2000 Index which is a measure of the performance of the small-cap segment of the US equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

International Developed Markets is represented by the MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada. With 921 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Emerging Markets is represented by the MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,125 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Growth is represented by the Russell 1000® Growth Index measures the performance of those Russell 1000® Index companies with lower price-to-book

ratios and lower forecasted growth values.

Value is represented by the Russell 1000® Value Index measures the performance of those Russell 1000® Index companies with higher price-to-book

ratios and higher forecasted growth values

US Government Bonds are represented by the Bloomberg Barclays US Government Index which is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the US government or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the US government

US Mortgage-Backed Securities are represented by the US Mortgage-Backed Securities (MBS) Index which covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

US Investment Grade Corporate Bonds are represented by the Bloomberg Barclays US Corporate Investment Grade Index which is an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB- or higher) by at least two ratings agencies, have at least one year to final maturity and have at least $250 million par amount outstanding.

US High Yield Corp is represented by the ICE BofAML U.S. High Yield Index tracks the performance of below investment grade, but not in default, US dollar denominated corporate bonds publicly issued in the US domestic market, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.

Floating Rate Bank Loans are represented by the Credit Suisse Leveraged Loan Index. The index represents tradable, senior-secured, U.S.-dollar-denominated non-investment-grade loans.

Global Equity is represented by the MSCI All World Country (ACWI) Index which is defined as a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI Index consists of 48 country indices comprising 24 developed markets countries and 24 emerging markets countries.

Emerging Markets Equity is represented by the MSCI EM Index which is defined as a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets countries

Intermediate Term Municipal Bonds are represented by the Bloomberg Barclays Municipal Bond Blend 1-15 Year (1-17 Yr) is an unmanaged index of municipal bonds with a minimum credit rating of at least Baa, issued as part of a deal of at least $50 million, that have a maturity value of at least $5 million and a maturity range of 12 to 17 years.

US Core Taxable Bonds are represented by the Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

US Government Bonds are represented by the Bloomberg Barclays US Government Index which is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the US government or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the US government.

US IG Corporate Bonds are represented by the Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

US High Yield Corporate Bonds are represented by the ICE BofAML US HY Master Index which is an index that tracks US dollar denominated debt below investment grade corporate debt publicly issued in the US domestic market.

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CN 2020-0558 EXP 12-2020