February 2020 

Market Summary

The Wuhan coronavirus outbreak led to the first market step back of 2020

  • Global stocks, which had been up through the third full week of 2020, were impacted by the rapidly spreading coronavirus.
  • Many emerging markets felt a one-two punch as declines were compounded by currency losses, especially for Brazil and Latin America. Similarly, returns for developed international countries fell – led by Norway, Austria and the Hong Kong.
  • US stocks slipped modestly in January, but notched fresh all-time highs near mid-month. Sector returns were starkly different as 6 of the 11 S&P 500 sectors rose for the month. An odd couple, utilities and technology, led the gainers, while energy fell more than 11%.
  • Commodities saw the lowest monthly returns in five years as three of the four major sectors sustained losses. Although also negative for the month, master limited partnerships (MLPs) fared somewhat better than broader commodities.

Safe-haven bid spells big bond returns for January

  • Bond yields fell across the board during January, though the speed accelerated as the month progressed and investors searched for safe havens. Accordingly, the yield on the 10-year US Treasury revisited the 1.5% range.
  • Bonds posted strong returns thanks to falling yields and continued strong bond fund inflows. Government bond segments, both in the US and globally, were propelled by the safe-haven scramble, as were other high quality segments such as US investment grade corporate bonds.
  • Municipal bonds notched their best month since 2013 and best January returns since 2009.

Improving global manufacturing data overshadowed by growth concerns

  • Global manufacturing data continued to gradually improve in January, along with other economic data generally. However, those readings were largely taken before the coronavirus outbreak, which fanned fears about global economic growth.
  • The United Kingdom officially left the European Union on January 31, beginning a transition period that will end on December 31. With that transition comes a rush to secure a trade agreement between the United Kingdom and the European Union by year end.
  • On the trade front, two key deals—the US-China Phase One Trade Agreement and the United States-Mexico-Canada Agreement—were formally signed into law, both of which had bipartisan support.

Market Overview

After the best annual return in 10 years, stocks took a step back in January

Global stocks, which had been up through the third full week of 2020, were impacted by the rapidly spreading coronavirus. Many emerging markets felt a one-two punch as declines were compounded by currency losses. Similarly, returns for developed international countries fell. US stocks slipped modestly in January, but notched fresh all-time highs near mid-month.

Bond yields fell across the board during January, though the speed accelerated as the month progressed and investors searched for safe havens. Bonds posted strong returns thanks to falling yields and continued strong bond fund inflows.

Commodities saw the lowest monthly returns in five years as three of the four major sectors sustained losses

Economic Overview

Global economic data generally improving

Global economic data continued to gradually improve in January as key countries, including the US, rebounded.

Specifically, global manufacturing data has climbed after bottoming this past summer. For instance, the IHS MarkIt Global Purchasing Manager’s Index has shown an expansion of manufacturing activity for the three months in a row (through January).

However, those readings were largely taken before the coronavirus outbreak, which fanned fears about global economic growth.

Taxable Bond Market Overview

Safe-haven bid spells big bond returns for January

Bond yields fell across the board during January, though the speed accelerated as the month progressed and investors searched for safe havens. Accordingly, the yield on the 10-year US Treasury revisited the 1.5% range.

Bonds posted strong returns thanks to falling yields and continued strong bond fund inflows. Government bond segments, both in the US and globally, were propelled by the safe-haven search, as were other high quality segments such as US investment grade corporate bonds.

Municipal bonds notched their best month since 2013 and best January returns since 2009.

Tax-Exempt Bond Market Overview

Municipal bonds notched best monthly returns since 2013

Municipal bonds had their best month since 2013 and best January returns since 2009.

New municipal bond issuance in January was $29.6 billion, down nearly 30% from December. The number of new issues also fell sharply, down 24% compared to December.

Meanwhile, municipal bond mutual- and exchange-traded funds inflows in January rose by $13.2 billion, according to preliminary data from the Investment Company Institute. It was the biggest monthly increase in at least four years and extend the inflows streak to 14 straight months.

Equity Market Overview

The Wuhan coronavirus outbreak led to the first market step back of 2020

Global stocks, which had been up through the third full week of 2020, were impacted by the rapidly spreading coronavirus.

Many emerging markets felt a one-two punch as declines were compounded by currency losses, especially for Brazil and Latin America. Similarly, returns for developed international countries tumbled led by Norway, Austria and the Hong Kong.

US stocks slipped modestly in January, but notched fresh all-time highs near mid-month. Sector returns were starkly different as 6 of the 11 S&P 500 sectors rose for the month. An odd couple, utilities and technology, led the gainers, while energy fell more than 11%.

Non-Traditional Investments: Commodities

Commodities sustained sharp losses in January

Commodities were hit with the lowest monthly returns in five years as three of the four key sectors—energy, agriculture and industrial metals—sustained losses.

Precious metals were the long bright spot in January as both silver and gold notched gains for the second straight month.
The energy sector saw double-digit declines in both crude oil and natural gas.

Within industrial metals, copper and nickel took the brunt of the losses, while aluminum and zinc had smaller declines.
Big declines by coffee and soybeans set the tone for agriculture, while cotton, wheat, and corn had modest losses.

Non-Traditional Investments Overview

Non-traditional strategies outperform amid choppy markets

Most non-traditional strategies managed modest gains for the month, in contrast to losses for broader equity markets.

Among the top performers were macro/CTA strategies, which climbed for the third month in a row, as systematic trend-following strategies outperformed.

Relative vale arbitrage strategies, which attempt to capture mispricing opportunities, extended their monthly streak of gains to four. Similarly, global hedge fund strategies also rose during January, stretching their monthly streak to an impressive eighth month.

Conversely, equity hedge strategies declined for the month.

Tactical Portfolio Strategy: February 2020

SunTrust Advisory Services, Inc.’s positioning outlook reflects the attractiveness of asset classes and strategies within a portfolio construct relative to our benchmark, considering potential risk and return scenarios over a tactical time horizon of 6-36 months based on economic, fundamental, and technical factors.

Performance Summary Through January 2020

Important Disclosures

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Asset Allocation does not assure a profit or protect against loss in declining financial markets.  Past performance is not an indication of future results.

Fixed Income Securities are subject to interest rate risk, credit risk, prepayment risk, market risk, and reinvestment risk. Fixed Income Securities, if held to maturity, may provide a fixed rate of return and a fixed principal value. Fixed Income Securities prices fluctuate and when redeemed, may be worth more or less than their original cost.

Leveraged loans bear more risk than traditional investment grade loans because they are issued by below investment grade companies.

High Yield Fixed Income Investments, also known as junk bonds, are considered speculative, involve greater risk of default and tend to be more volatile than investment grade fixed income securities.

International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include potential economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in emerging market countries, since these countries may have relatively unstable governments and less established markets and economies.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations, and illiquidity.

Emerging Markets: Investing in the securities of such companies and countries involves certain considerations not usually associated with investing in developed countries, including unstable political and economic conditions, adverse geopolitical developments, price volatility, lack of liquidity, and fluctuations in currency exchange rates.

Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.

Managed Futures and commodity investing involve a high degree of risk and are not suitable for all investors. Investors could lose a substantial amount of money in a very short period of time. The amount you may lose is potentially unlimited and can exceed the amount you originally deposit with your broker. This is because trading security futures is highly leveraged, with a relatively small amount of money controlling assets having a much greater value. Investors who are uncomfortable with this level of risk should not trade managed futures or commodities.

Real Estate Investments are subject to special risks, including interest rate and property value fluctuations, as well as risks related to general economic conditions. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Asset classes are represented by the following indexes:

MSCI ACWI Index (MCSI All Country World) is 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 consists of 45 country indices comprising 24 developed and 21 emerging market country indices.

MSCI World captures large and mid cap representation across 23 Developed Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

MSCI EM Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

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

NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based Index.

Russell 1000 Index is a measure of the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.

Russell 3000 Index measures the performance of the 3000 largest US companies based on total market capitalization, which represents approximately 98% of the investable US equity market.

Russell Mid Cap Index is a measure of the performance of the mid-cap segment of the US equity universe. The Russell Midcap is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

Russell 2000 Index is comprised of 2000 smaller company stocks and is generally used as a measure of small-cap stock performance.

FTSE NAREIT US Real Estate Index Series is designed to present investors with a comprehensive family of REIT performance indexes that span the commercial real estate space across the US economy, offering exposure to all investment and property sectors.

Bloomberg Commodity Index is composed of futures contracts on physical commodities. It currently includes 19 commodity futures in seven sectors. 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.

Bloomberg Barclays Aggregate Bond Index is the broadest measure of the taxable US bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of one year or more.

Bloomberg Barclays Intermediate Government/Credit index represents securities that are SEC-registered, taxable, and dollar denominated. The index measures the performance of US Dollar denominated US Treasuries, government-related and investment grade US corporate securities that have a remaining maturity of greater than one year and less than ten years.

Bloomberg Barclays US MBS Fixed Rate Index 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). Pool aggregates must have at least USA 250mn current outstanding, fixed-rate pool aggregates comprise individual TBA deliverable MBS pools mapped on the basis of agency, program, coupon, and origination year of the pool. Rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P, and Fitch after dropping the highest and lowest available ratings. When a rating from only two agencies is available, the lower (“more conservative”) is used. When a rating from only one agency is available, that is used to determine index eligibility. Pool aggregates must have a weighted average maturity of at least 1 year.

ICE BofAML Treasury Master is an unmanaged index tracking government securities.

ICE BofAML US Inflation-Linked Treasury Index: Tracks the performance of US dollar denominated inflation-linked sovereign debt publicly issued by the US government in its domestic market. Qualifying securities must have at least one year remaining term to final maturity, interest and principal payments tied to inflation and a minimum amount outstanding of $1 billion. Strips are excluded from the Index; however, original issue zero coupon bonds are included in the Index and the amounts outstanding of qualifying coupon securities are not reduced by any portions that have been stripped.

Bloomberg Barclays US Treasury Bellwether Indices are a series of benchmarks tracking the performance and attributes of six on-the-run US Treasuries that reflect the most recently issued 3m, 6m, 2y, 3y, 5y, 10y, and 30y securities. The bellwether indices follow Barclays index monthly rebalancing conventions.

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.

ICE BofAML US Corporate Master is an unmanaged index comprised of U.S. dollar denominated investment grade corporate debt securities publicly issued in the U.S. domestic market with at least one year remaining term to final maturity.

ICE BofAML US HY Master index is an index that tracks US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.

ICE BofAML Global Government Index tracks the performance of publicly issued investment grade sovereign debt denominated in the issuer’s own domestic currency. In order to qualify for inclusion in the Index, a country (i) must be a member of the FX-G10 or Western Europe; (ii) must have an investment grade foreign currency long-term sovereign debt rating (based on an average of Moody’s, S&P and Fitch); (iii) must have at $50 billion (USD equivalent) outstanding face value of Index qualifying debt (i.e., after imposing constituent level filters on amount outstanding, remaining term to maturity, etc.) to enter the Index; (iv) must have at least $25 billion (USD equivalent) in outstanding face value of Index qualifying debt in order to remain in the Index; (v) must be available to foreign investors; and (vi) must have at least one readily available, transparent price source for its securities. The FX-G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden.

ICE BofAML Global Government ex US Index is a subset of ICE BofAML Global Government Index excluding all securities denominated in US dollars.

JP Morgan GBI-EM Global Diversified Composite is a comprehensive emerging market debt index that tracks local currency bonds issued by Emerging Market governments. It includes only those countries that are directly accessible by most of the international investor base and excludes countries with explicit capital controls, but does not factor in regulatory/tax hurdles in assessing eligibility. The maximum weight to any country in the index is capped at 10%.

HFRX Indices (HFRX) are a series of benchmarks of hedge fund industry performance which are engineered to achieve representative performance of a larger universe of hedge fund strategies. Hedge Fund Research, Inc. (“HFR, Inc.”) employs the HFRX Methodology, a proprietary and highly quantitative process by which hedge funds are selected as constituents for the HFRX Indices. This methodology includes robust classification, cluster analysis, correlation analysis, advanced optimization and Monte Carlo simulations. More specifically, the HFRX Methodology defines certain qualitative characteristics, such as: whether the fund is open to transparent fund investment and the satisfaction of the index manager’s due diligence requirements. Production of the HFRX Methodology results in a model output which selects funds that, when aggregated and weighted, have the highest statistical likelihood of producing a return series that is most representative of the reference universe of strategies.

The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility. VIX is often referred to as the “investor fear gauge“.

MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. MSCI All-Country World ex-US Index: is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, ex-US equities.

The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

It is not possible to invest directly in an index.

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CN2020-0349 EXP12-2020