April 9, 2020 - Mercer€¦ · April 9,...

Anthony Brown

US Director of Capital Markets

anthony.brown@mercer.com

Jay Love

US Investments Leader

jay.love@mercer.com

Susan McDermott

US Director of Strategic Research

susan.mcdermott@mercer.com

April 9, 2020

-43.9

-42.3

-28.3

-27.5

-23.6

-23.2

-22.8

-21.4

-19.6

-15.2

-12.7

-6.0

-3.6

0.5

1.7

2.0

3.2

8.2

20.9

-60 -40 -20 0 20 40

Natural Res Stks

Commodity Futures

Global REITs

Intl Sm-Cap Stks

Emerg Mkt Stks

US SMID-Cap Stks

Intl Large-Cap Stks

Global Stocks

US Large-Cap Stks

Emerg Mkt Debt (Local)

US High Yield Bonds

Funds of Hedge Funds

US I/G Corp Bonds

T-Bills

US TIPS

Global Fixed (unhedged)

Aggregate Bonds

US Treasuries

Long Treasuries

First Quarter Performance (%)

Source: Datastream

-60%

-50%

-40%

-30%

-20%

-10%

0%

0 2 4 6 8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

39

41

43

45

47

49

51

53

55

S&P 500 Drawdowns

Tech Bubble GFC COVID-19

Months from PeakSource: Bloomberg; through 4/9/20

0

1

2

3

4

5

6

2012 2013 2015 2017 2019

Yield History

2-Year Treasury 10-Year Treasury

30-Year Treasury Long Corporate

Source: Bloomberg, Federal Reserve; through 3/31/20

(%)

90%

95%

100%

105%

0 1 2 3 4 5 6 7 8

Pe

rcen

t o

f S

tart

ing G

DP

Quarters Since Beginning of Recession

US Real GDP

2020 Consensus Forecast 2008 2000

Source: Bloomberg, St. Louis Federal Reserve Bank (FRED).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

201

5

201

6

201

7

201

8

201

9

202

0

(%)

Investment-grade CorporateCredit Spread

Source: Bloomberg; through 4/7/20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

(%)

LIBOR-OIS Spread

Source: Bloomberg; through 4/2/20

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

$T

rilli

on

s

Federal Reserve Assets and Excess Bank Reserves

Federal Reserve Assets

Excess Bank Reserves

Source: Bloomberg; through 4/1/20

-4

-2

0

2

4

6

8

10

193

0

193

7

194

4

195

1

195

8

196

5

197

2

197

9

198

6

199

3

200

0

200

7

201

4

(%)

CPI InflationRolling 10 Years

Source: Bloomberg; through 12/31/19

0.0

0.5

1.0

1.5

2.0

2.5

3.0

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

202

0

(%)

Inflation Breakeven Rate on 10y TIPS

Source: Bloomberg; through 4/8/20

0.0

1.0

2.0

3.0

4.0

5.0

6.0

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

201

9

(%)

Investment-Grade Corporate Bond Credit Spread

OAS

Median OAS

Source: Bloomberg; through 3/31/20

0

500

1,000

1,500

2,000

2,500

3,000

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

$ B

illio

ns

Outstanding Par Value of Corporate Baa Universe

Source: Bloomberg; through 3/31/20

0

2

4

6

8

10

12

14

16

18

20

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

201

9

(%)

High Yield Bond Option Adjusted Credit Spread

OAS

Median OAS

Source: Bloomberg; through 3/31/20

HY

OAS

Quintile Range 12M 36M

1 <3.4 -0.4 -2.0

2 3.4 to 4.1 3.6 2.2

3 4.1 to 5.2 -1.3 0.6

4 5.2 to 6.8 2.6 3.6

5 >6.8 9.9 8.0

Subsequent Average Excess

Return to Treasuries

1 9 8 7 T O 2 0 1 9

Source: Bloomberg, Mercer calculations

-30

-20

-10

0

10

20

30

40

Ja

n-1

5

Ju

n-1

5

Nov-1

5

Apr-

16

Sep

-16

Fe

b-1

7

Ju

l-1

7

Dec-1

7

Ma

y-1

8

Oct-

18

Ma

r-19

Aug

-19

Ja

n-2

0

De

c-0

7 =

1

Forward Earnings EstimatesYear-over-year Change

US Eurozone

UK Japan

Emerging

Source: Datastream; through 3/31/20

0

10

20

30

40

50

60

70

Pe

r S

ha

re

S&P 500 Dividend Futures

Source: CME Group; as of 4/8/20

0

5

10

15

20

25

30

35

40

45

197

81

98

01

98

21

98

41

98

61

98

81

99

01

99

21

99

41

99

61

99

82

00

02

00

22

00

42

00

62

00

82

01

02

01

22

01

42

01

62

01

8

Shiller P/E(10y Average Real Earnings)

MSCI US

MSCI EASEA (EAFEex-Japan)

Source: Datastream, MSCI, Mercer; through 3/31/20

18.0

13.012.6

12.5

22.7

12.7

16.2

10.5

2.3

4.5

2.8 3.2

0

5

10

15

20

25

30

MSCI US MSCIEurope

MSCIJapan

MSCI EM

Global Valuations

P/E Trailing

Shiller's P/E

Dividend Yield

Source: Bloomberg, Datastream, Mercer; as of 3/31/20

-2

-1

0

1

2

3

4

5

6

7

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

202

0

(%)

S&P 500 - Equity Risk Premium Versus Long-Term Treasuries

Source: Bloomberg, Datastream, Mercer; through 3/31/20

75

80

85

90

95

100

105

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

Ja

n-1

4

Ju

l-1

4

Ja

n-1

5

Ju

l-1

5

Ja

n-1

6

Ju

l-1

6

Ja

n-1

7

Ju

l-1

7

Ja

n-1

8

Ju

l-1

8

Ja

n-1

9

Ju

l-1

9

Ja

n-2

0

DX

Y

US

/ D

XY

Ba

ske

t 1

0y R

ate

Sp

rea

d

Dollar Index (DXY) and10y Rate Spread

US / DXY Basket 10y Rate Spread (LHS)

DXY (RHS)

Source: Bloomberg; through 3/31/20

-20

-10

0

10

20

30

40

50

197

3

197

6

197

9

198

2

198

5

198

8

199

1

199

4

199

7

200

0

200

3

200

6

200

9

201

2

201

5

201

8

Rela

tive

to

Ge

om

etr

ic M

ea

n (

%)

US Dollar - Real Effective Exchange Rate

(Major Currencies)

Source: Bloomberg; through 12/31/19

-12.5%

-24.2%

-20.0%

-31.7%

-25.8%

-35.7%

-15.1%

-17.3%

-40% -30% -20% -10% 0%

Russell Top 200 Gr

Russell Top 200 Val

Russell Midcap Gr

Russell Midcap Val

Russell 2000 Gr

Russell 2000 Val

MSCI USA Quality

MSCI USA Min Vol

US Style PerformanceFirst Quarter

Source: Datastream

-20

-15

-10

-5

0

5

10

15

200.0

0.3

0.5

0.8

1.0

1.3

1.5

1.8

2.0

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6

201

9

Russe

ll 1

00

0G

–R

usse

ll 1

00

0V

5y (

%)

Re

lative

to

Me

an

Russell 1000 Growth/Value Valuationand Subsequent Performance

Valuation of R1000G/R1000V

Subsequent 5-Yr Relative Return (R1000G - R1000V)

Source: Bloomberg, Mercer; through 3/31/20

-15

-10

-5

0

5

10

15

20-80

-60

-40

-20

0

20

40

60

198

0

198

4

198

7

199

0

199

4

199

7

200

0

200

4

200

7

201

0

201

4

201

7

Ru

ss

ell

20

00

-S

&P

50

0 5

y

(%)

Devia

tio

n f

rom

Me

an

(%

)

Small-caps / Large-caps Valuationand Subsequent Performance

Relative Valuation (LHS)

Subsequent 5y Excess Return (RHS)

Source: Ned Davis Research, Bloomberg, Datastream,

Mercer; through 3/31/20

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2. Revisit risk tolerance and time horizon

3. Understand current portfolio and exposures

4. Consider opportunities for action

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% off Target

$

Net Benefits =

Benefits -

Costs

Costs

T

Action Trigger Point

(T) where benefits

exceed cost

Benefit

Rebalance halfway to

target to get most of the

potential benefits with

reduced cost

Ris

k R

ed

uc

tio

n B

en

efi

t /

Co

st

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27© MERCER LLC 2020

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