Quarterly Market Commentary Q1, 2020 - oxfordharriman.com€¦ · Quarterly Market Commentary Q1, 2020 The Covid-19 crisis effects on financial markets have been swift and severe

Quarterly Market Commentary Q1, 2020The Coronavirus Market Impact An Oxford Harriman & Company Market Commentary

Q1 Quick Summary

• Global equities were down across the board as investors priced in the likelihood

that COVID-19, and related containment efforts, will likely cause a global

recession. The uncertainty surrounding the disease’s global spread complicated

economic forecasts and clouded earnings & GDP visibility.

• During Q1, the MSCI All Country World Index lost 21.3%, while the S&P 500

Index fell 19.6%. Also, non-core bond segments lost considerable value as most

risk-assets experienced panic selling pressure. Of note, the Bloomberg Barclays

U.S. High Yield Index lost 12.7% and the Bloomberg Barclays Investment Grade

Corporate Index fell 3.6%. The sell-off across most risk-asset segments occurred

faster than the economic crisis during 2008.

• The 10-yr Treasury yield ended the period at 0.67%, an all-time low.

• U.S. fiscal policymakers worked to offset the virus-induced economic damage

by rolling out a $2 trillion economic relief package, and the Federal Reserve

dusted off 2008-era market support programs. Relative to 2008, fiscal and

monetary action materialized much more swiftly.

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Shock to Economy and Markets

As COVID-19 cases emerged globally from east to west a material health crisis

was transformed into an economic shock as world governments enacted strict

containment policies and shut down many sectors of their economies. The

precipitous rise in the number of coronavirus cases globally and the uncertain

extent of the economic damage led to panic in markets, as well as forced selling

of financial assets. Nearly all risk-asset prices came under pressure during the first

quarter as correlations converged. Selling pressure was indiscriminate, which left

Treasury bonds and cash as the lone safe havens. Even gold prices fell sharply as

investors reached for all available assets in an effort to raise cash.

In fact, the speed of the risk-asset drawdown was faster than in 2008 as equity

markets reached correction territory (-10%) and bear market territory (-20%) in

record time. Historically, equity corrections and bear markets have taken months to

develop. During this drawdown, major equity indices reached bear-market levels in

a matter of days.

Economically, disease containment efforts have caused most economists to slash

Q1 and Q2 GDP growth expectations in the U.S. and globally. Unemployment

rates are expected to rise dramatically as well, with depression-like U.S. readings

expected. We believe U.S. unemployment rates could peak above 10% and exceed

levels witnessed during the global financial crisis. However, many forecasters

are indicating a material economic rebound may follow in the third quarter. Any

recovery should remain dependent on the length of government containment

Quarterly Market Commentary Q1, 2020

The Covid-19 crisis effects on financial markets have been swift

and severe.

The negative economic and market ramifications, however, have been somewhat offset by historic fiscal

and monetary policy responses.

We anticipate that both the economy and market may sustain a

welcome recovery in 2H 2020.

Several economic forecasts are calling for a 25% to 40% drop in Q2

U.S. GDP and U.S. unemployment could spike to 10-15%.

However, we believe both GDP and unemployment figures could

materially improve in Q3.

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efforts. In such a rebound scenario, employment is expected to recover as well, but

perhaps not as rapidly as GDP. While the expectation of some economic rebound

in Q3 is positive, the potential long-term economic damage as a result of the virus

shutdown is justifiably keeping investors nervous.

Our biggest concern for the economy may not be the short-term damage and

surprise of the shutdown. The unknown aftermath of the damage will likely take

time to unfold. Many direct customer-facing industries have been ordered closed

and industrial activity has been halted in numerous sectors. Supply chains have

been disrupted, detoured or cut off. Most consumer activity has been relegated

to purchases online or limited to grocery or other essential categories. Many

consumer and business incomes have been cut or pushed to zero. The effects

of containment may destroy many businesses, large and small, although new

government legislation has attempted to mitigate the worst case. Although

the government has incented businesses to retain employees, workers may

permanently lose jobs or be slow to return to work as the economy recovers. Due

to this unprecedented event, there is little visibility into when or how sharp the

recovery may be. As a result, risk assets may remain volatile.

Government Relief Programs

During the first quarter, Washington D.C. has certainly reacted quickly, repeatedly,

and with considerable force. Both monetary and fiscal programs instituted may


The composite Purchasing Managers’ Index (PMI) is a measure

of manufacturing and services sector business activity.

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have to clear some red tape before relief hits pocketbooks and balance sheets,

however policy support has indeed been more decisive than during 2008.

The Federal Reserve has re instituted 2008-era relief programs to support

markets and has operated at the fringes of its power to support both private and

public markets. The central bank has shown that it is not short of policy tools to

potentially affect the economy, even with its policy rate effectively at zero. The most

recent Fed action (announced on April 9) provides as much as $2.3 trillion in loans

to support small and mid-sized businesses, state and local governments, as well as

expanded support for large firms.

According to Bloomberg, the $2.3 trillion package is three times larger than the

total borrowed by the U.S. non-financial business and state and local government

sectors last year ($747 billion), and the package is more than a tenth of those

segments’ debt at the end of 2019 ($19.1 trillion). It is clear the Fed has aimed

considerable firepower at the problem.

Some of the lending/support facilities in which the Federal Reserve is now engaged

include:

• The Main Street New Loan Facility and the Main Street Expanded Loan

Facility—both programs combined will purchase as much as 95% of eligible

business loans from depository institutions. The depository institutions will

retain 5%. The combined size of the two facilities will be as much as $600

billion, backed by $75 billion of Treasury funds. Effectively, this allows the Fed

to buy loans off bank books allowing those banks to engage in additional

loan activity. Recall that current bank regulations place a limit on certain loan

activities relative to bank capital.

• The Paycheck Protection Program Lending Facility will supply liquidity to

participating financial institutions via term financing backed by Paycheck

Protection Program loans to small businesses. We believe this facility will

incent depository institutions to write Paycheck Protection Loans for small

businesses.

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• The Municipal Lending Facility will purchase as much as $500 billion of short-

term notes directly from U.S. states and eligible counties and cities. The facility

is backed by $35 billion from the Treasury.

• The Primary and Secondary Market Corporate Credit Facilities and the Term

Asset-Backed Securities Loan Facility are backed by $85 billion from the U.S.

Treasury and scheduled to provide as much as $850 billion in direct primary

and secondary market purchase support for U.S. investment grade corporate

bonds, portions of the high-yield U.S. corporate bond market, commercial

mortgage-backed securities, and other asset-backed securities that fund a

wide range of lending including student loans, auto loans, and credit cards.

What is unique about the recent Fed action is the central bank is using a portion

of the CARES Act funding, left to the discretion of the U.S. Treasury, to effectively

collateralize its lending and financial market support activity. We do believe such

polices will have a dramatic effect on the U.S. economy and contribute heavily to

its stability and recovery. This bolsters the possibility of a Q3 rebound in economic

activity and the re ignition of sustained demand for risk-based assets.

Although the policy strategy is innovative and points to the power and re-solve of

the government to correct the problem, such an endeavor does further expose the

central bank to moral hazard criticism.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

Recently enacted legislation provides relief for families and businesses impacted by

the coronavirus pandemic. The high level summary below highlights some of the

provisions that primarily are geared toward individuals and business owners. There

are many other provisions in this very comprehensive recovery legislation which are

beyond the scope of this publication.

These include loan programs for businesses, expanded unemployment insurance

benefits, new provisions on sick leave and family leave, and funding for a variety of

health-related efforts and government programs. Always be sure to work closely

with your own tax advisor for guidance in applying these new rules to your own

situation.

Federal Reserve policy certainly has certainly been

swift and bold...and we believe it will be effective in

lifting the economy.

Long-term, we believe the constant conciliatory bias of

Fed intervention is unhealthy for the sustainability of a

competitive economy and market.

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Federal fiscal policymakers are debating other stimulus packages in addition to the

CARES Act.

For Individuals:

Stimulus payments

Payments of $1,200 (single/head of household) and $2,400 (joint filers) will be

sent to taxpayers within certain income limits. An additional $500 payment is

available for each qualifying child.

These payments will be determined based on your most recently filed tax return

or Social Security benefit statement, if no return was filed. The amount of the

payment is reduced by 5% of the amount by which income exceeds $75,000,

$112,500 (head of household), or $150,000 (joint).

IRA distributions

Required minimum distribution rules are waived for 2020 distributions from

IRAs, including inherited IRAs and 2019 distributions taken in 2020 which had a

required beginning date of April 1, 2020.

Distributions from IRAs received during 2020 of up to $100,000 for COVID-19

related purposes are allowed without a 10% penalty for pre-59 ½ distributions,

taxable evenly over 3 years beginning with year of distribution, and may be

recontributed within 3 years. Related purposes include a COVID-19 diagnosis for

you, your spouse or dependent, and financial hardship as a result of business

closures, reduced work hours, lay off, furlough, lack of child care or other factors

as determined by the Treasury Secretary.

Retirement plan distributions and loans

Required minimum distribution rules are waived for 2020 distributions from

certain defined contribution plans including 401(k), 403(b), 457(b) and IRA based

plans.

Distributions taken from qualified retirement plans received during 2020 of up

to $100,000 for COVID-19 related purposes are allowed without a 10% penalty,

taxable evenly over 3 years beginning with year of distribution, and may be

recontributed within 3 years. Related purposes include a COVID-19 diagnosis for

you, your spouse or dependent, and financial hardship as a result of business

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closures, reduced work hours, lay off, furlough, lack of child care or other factors

as determined by the Treasury Secretary.

Qualified retirement plan loan provisions are broadened to allow loans up to

$100,000 or 100% of the participant’s vested account balance, whichever is less.

This applies to loans made within 180 days of enactment. Loan payments due

from the date of enactment of the CARES Act until 12/31/20 may be delayed.

Student loan payment deferral

Student loan payments and accrual of interest under certain federal loan

programs are suspended through September 30, 2020. Contact your loan

provider for information about your specific student loan.

Charitable contribution deduction

A charitable deduction of up to $300 is allowed for those who do not itemized

their deductions.

The adjusted gross income limitation is waived allowing you to offset more of

your taxable income.

These two items apply only to cash contributions and are not available for

contributions to donor advised funds or other supporting organizations.

For businesses:

Delayed payment of some employment taxes

Employers and self-employed individuals may defer payment of the employer

share of applicable Social Security taxes beginning on the date of enactment

through the remainder of 2020. The deferred amount may be paid over 2 years,

half in 2021 and half in 2022. These taxes are being deferred, not forgiven, so

businesses should be mindful about planning to pay these tax liabilities when

they eventually come due.

Expanded use of losses

Net operating losses (NOLs) from 2018, 2019, or 2020 may be carried back 5 years.

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The 80% income limitation on use of NOLs is temporarily suspended.

The limitation on use of excess business losses is temporarily suspended.

Defined benefit plan funding requirements

Single employer defined benefit plans normally required to be funded in 2020

have their funding deadline extended to January 1, 2021. The delayed funding

will need to include interest accrued during the delay.

Charitable contribution deduction

The taxable income limitation for 2020 charitable contributions made by

corporations is increased to 25%, if the contributions are made in cash and

are not made to donor advised funds or other supporting organizations. The

limitation on contributions of food inventory is also increased to 25%.

Initial Considerations:

Accessing retirement plans

If you expect to access your retirement plan at work to meet unexpected cash

flow needs, it is very important to first talk with the plan administrator to fully

understand all of your options. It is equally important to talk with your tax

advisor to ensure you are eligible for these provisions and make appropriate

plans for paying taxes on withdrawals.

Charitable giving

Individuals who are in a position to make very generous charitable gifts can

get tax benefits that were previously unavailable. With this temporary relief

of income limitations on charitable gifts, these individuals may also want to

consider recognizing income since it could be fully offset by your charitable

gift. This may be a brief opportunity to consider a Roth IRA conversion or selling

highly appreciated securities in conjunction with your qualifying charitable gift.

Work closely with your tax advisor to do a detailed tax projection so that you

will be fully aware of how a particular planning strategy would impact your

overall tax return.

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Amending business owner tax returns

The changes to NOL rules may provide an opportunity to amend previously filed

income tax returns to access refunds of tax paid in prior years. Work with your

tax advisor to determine your ability to access cash flow in this manner.

Many of these provisions contain limitations and other time sensitive or technical

requirements that must be considered in order to fully take advantage of them. The

next step is to connect with your advisors.

• Your tax advisor can help you understand how this legislation will impact your

federal and state tax situation. Your state may not follow these federal laws or

may put forth its own legislation.

• Your financial advisor can assess your overall financial picture and coordinate

your cash flow needs.

• Your plan administrator can discuss the changes to your retirement plan.

• Your local unemployment office is another resource to help you navigate

additional loss-of-pay provisions designed for those who have been unable to

work.

Wells Fargo Advisors is not a tax or legal advisor. While this information is not intended to replace your discussions with your tax advisor, it may help you to comprehend the tax implications of your investments and plan efficiently going forward.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and nonbank affiliates of Wells Fargo & Company. © 2020 Wells Fargo Clearing Services, LLC. All rights reserved. CAR-0320-04765

Recovery Trajectory

As we study this volatile economic and market environment, and develop our

investment outlook, there are four primary areas of focus. We are hopeful the

positive progression of each could help shape the foundation for a sustained

recovery in markets, followed by an economic bounce back. The areas of focus are:

1. Lifting of virus containment measures by governments – The timing of and

economic return to normalcy in the U.S. is uncertain and will be heavily

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debated in the coming weeks. Delays in restarting the economy and or a

decidedly slow restart could curtail expectations for an economic rebound

in Q3 and weigh on financial markets. In ourv iew, this is the biggest source

of uncertainty for the markets.

2. Normalcy in fixed-income markets - Helped in large part by Federal Reserve

policy, fixed income markets have begun to correct from the dramatic

spread-widening during this crisis. Fed support for both investment-grade

and high-yield corporate markets should offset some of the balance sheet

problems likely to be exposed by the economic shock. Such support has

materially helped equity markets and should set the stage for a sustained

recovery in stocks.

Wide yield spreads relative to Treasuries are a sign of

stressed pricing in bond markets.

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Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Oxford Harriman & Company is a separate entity from WFAFN. ©2020 Wells Fargo Advisors Financial Network, LLC. All rights reserved. CAR-0420-01986

Important Disclosures:

The views expressed by the author are his own and do not necessarily reflect the opinion of Wells Fargo Advisors Financial Network or its affiliates. This and/or the accompanying statistical information was prepared by or obtained from sources that Wells Fargo Advisors Financial Network believes to be reliable, but its accuracy is not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The MSCI Emerging Markets Index is designed to represent the performance of large- and mid-cap securities in 24 Emerging Markets. Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index is the intermediate component of the Bloomberg Barclays U.S. Government/Credit Index which is generally representative of government and investment grade corporate debt securities.

3. Fiscal and monetary policy responses - As we have detailed in this report,

the policy responses have been extraordinary and there may be more to

come. They have helped stabilize markets and should have a positively

short-term influence the U.S. economy once restarted. The degree of relief/

stimulus aids our constructive outlook for a Q2 recovery in risk-based asset

prices and a Q3 recovery for the economy.

Oxford Harriman & Company

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Quarterly Market Commentary Q1, 2020 - oxfordharriman.com€¦ · Quarterly Market Commentary Q1, 2020 The Covid-19 crisis effects on financial markets have been swift and severe