Weekly Market Guide - Raymond James

PORTFOLIO STRATEGY | PUBLISHED BYRAYMOND JAMES & ASSOCIATES

Michael Gibbs, Director of Equity Portfolio & Technical Strategy | (901) 579-4346 | [email protected] Madere, CFA | (901) 529-5331 | [email protected] Sewell, CFA | (901) 524-4194 | [email protected] Clayton, CMT, Senior Technical Analyst | (901) 579-4812 | [email protected]

MARCH 12, 2020 | 8:04 PM EDT

Weekly Market Guide

Short-Term Summary: Investor fear is setting in as the COVID-19 outbreak officially reached "pandemic" statusaccording to the World Health Organization (WHO). Globally, normal life is now being disrupted (school closures,banning large gatherings, cancellation of sporting events) in hopes to contain the spread of the virus, which willcontinue to pressure the outlook for global growth. According to our Health Care policy analyst, Chris Meekins,sentiment in the near-term will remain volatile and get worse before it gets better, as access to testing becomesmore robust in the US. He believes over the next 5-7 days further clarity on the overall impact should emerge. Asmarkets have a tendency to overreact to uncertainties, equities may continue to be pressured in the near-term asnew cases rise. Our belief is the impact is transitory and the market will begin to discount the eventual back halfrecovery. It is difficult to say where the final bottom will hold, as the market is still in price discovery mode, andmarkets have a tendency to overshoot during periods of panic.

However, we would urge investors not to panic and sell indiscriminately. Market bottoms tend to see violentsnapbacks with the average return of 15% with the first 30-days of the market bottom and 21% within the first60-days. During recessionary bear markets, the average draw-down of the market is 33% (median of -24%) withan average draw-down of 24% in non-recessionary bear markets (median of -22%) dating back to 1957. However,equities returned to new highs (from lows) in 27 months (median 12 months) from recessionary bear market lowsand an average 11 months (median 11 months) from non-recessionary bear markets.

Technicals: With a confluence of "black swan" events acting as a catalyst to accelerate the waterfall sell-off thisweek (COVID-19 and oil price war) and push the market into bear market territory, fear indicators spiked this week.While these indicators have historically not been useful at picking an absolute low, they serve as useful signalsthat the odds are elevated that the market may be nearing a low in the short-term.

In sum: The final low is unknown, but near-term, equities may continues to be pressured as sentiment likely getsworse. However, equities tend to discount the future, and once the scope of the outbreak is clarified, we believeequities can begin to re-rate higher anticipating recovery in the back half of the year. Moreover, recent monetaryactions by the Fed (and others around the world) and potential fiscal stimulus may provide additional accelerantonce the virus is contained. Valuation tends to bottom prior to the eventual bottom in earnings revisions andmacro deterioration. Given the discount of eventual recovery, we believe the S&P 500 will likely be higher withinthe next 12-24 months.

.

.

INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER | 880 CARILLON PARKWAY | ST. PETERSBURG FLORIDA 33716

MACRO: US

Coronavirus and the dampened economic outlook continue to get most of the attention. Overall, recent macro data has largely been discounted as it doesn’t reflect the full impact of the virus. However, jobs data has remained relatively resilient with February payrolls showing a large beat vs. expectations and today’s weekly jobless claims better-than-expected. In order to support the economy, the Fed (monetary action) has been busy with a 50 bps cut last week (with expectations of an additional 75 bps cut at the March meeting) and expansion of the balance sheet through injection of liquidity into the repo market. Additionally, fiscal stimulus is being considered to counteract the impact of the coronavirus. While there has been bipartisan pushback at a large scale fiscal stimulus package until there is more clarity on the overall economic impact, these could prove to be accelerants to the recovery once, what we believe should be transitory, impact of the coronavirus is contained. Today’s jobs report may add more rationale to detractors waiting for the macro environment to worsen before taking actions. Moreover, low interest rates and deflationary environment (lower oil prices driven by the price war between Saudi Arabia and Russia) may provide additional upside.

US economic data reported in the past week (actual vs estimate): Nonfarm Payrolls (Feb): 273k vs. 175k; 225k prior (273k revised) Private Payrolls (Feb): 228k vs. 160k; 206k prior (222k revised) Manufacturing Payrolls (Feb): 15k vs. -3k; -12k prior (-20k revised) Unemployment Rate (Feb): 3.5% vs. 3.6%; 3.6% prior Average Hourly Earnings YoY (Feb): 3.0% vs. 3.0%; 3.1% prior Labor Force Participation Rate (Feb): 63.4% vs. 63.4%; 63.4% prior NFIB Small Business Optimism (Feb): 104.5 vs. 102.9; 104.3 prior MBA Mortgage Applications: 55.4% vs. 15.1% prior CPI (ex-food and Energy) m/m (Feb): 0.2% vs. 0.2%; 0.2% prior PPI (ex-food and Energy) m/m (Feb): -0.3% vs. 0.1%, 0.5% prior Initial Jobless Claims (weekly): 211k vs. 220k; 216k prior (215k revised) Bloomberg Consumer Comfort: 62.7 vs. 63.0 prior

Source: FactSet, Raymond James Equity Portfolio & Technical Strategy

US Nonfarm Payrolls

Latest reading: 273k vs. 30-year average of 120k

US Initial Jobless Claims

US jobs market remains resilient (although likely not

reflecting impact of COVID-19 impact in the US)

PAGE 2 OF 13

PORTFOLIO STRATEGY

FUNDAMENTALS

Earnings: The impact from the coronavirus is being reflected by companies lowering guidance (or temporarily suspending forward guidance given the uncertainty). Top-down strategists have drastically reduced 2020 forecasts with earnings now at $173.98. However, as we have said, the market will at some point begin to discount an earnings recovery in the back half of the year. Despite the drastic cut to earnings in 2020, top-down Strategists consensus expectations have stayed consistent to last week at $190.06 in 2021. Despite the increased uncertainty to economic forecasts, we are sticking with our 2020 forecast (for now) of $167.

Consensus earnings estimates: • 2020: $172.82 (bottom-up analysts); $173.98 (top-down strategists). RJ: $167 • 2021: $193.38 (bottom-up analysts); $190.06 (top-down strategists).


Valuation: We maintain our 19.5x P/E for year-end and next 12 months, taking our 2020 S&P 500 target price to 3256. Low inflation, low interest rates, more attractive valuation than a few weeks ago, and monetary and fiscal stimulus influence our opinion as the economy recovers from the transitory issues. The valuation of 17.7x is now below the 5-year average of 18.3x.

2020 GDP

Growth

RJ 2020 EPS

Estimate

1.80% $174

1.30% $170

1% $167

EPS Sensitivity to GDP Growth

EPS Multiple

Price

Target

Potential

Return*

Bull 173$ 21.00x 3,633 46.5%

Base 167$ 19.50x 3,257 31.3%

Bear 162$ 16.00x 2,592 4.5%

2020 Price Target

PAGE 3 OF 13

PORTFOLIO STRATEGY

TECHNICAL: SHORT TERM Technical: The market is in free fall. Historically, technicals and fundamentals provide little support in waterfall sell-offs. However, as we discuss further, the 200-week moving average has acted as support during the sell-off during 1987, 2011, and 2018. However, in 1962 during the Cuban missile crisis, the market fell ~12% below this level of support. In this scenario, 12% below the 200-week moving average of ~2640 would be ~2322, or roughly 6% below today’s closing price. Another areas of support consistent with this price level would be the December 2018 lows of 2346. Volatility will continue in the near-term as the rising number of cases in the US likely put further pressure on stocks. With the heightened risk to the economic outlook, flat earnings of $162 in 2020 at a 16x multiple would provide fundamental support around the $2590, which is above where the market closed today. Moreover, in recessionary conditions (which is not our base case assumption), we find support around the 2559-2235 level. It is also important to remember that bottoms generally take time to form. However, the snapback from the initial lows are often violent once the market begins to discount economic recovery (which is often before the negative headlines ends). It is important to not lose sight of the long-term (which is easy when the volatility remains this high). Instead of trying to pick the final low, we suggest long-term investors patiently accumulate weak periods in the period ahead. Regardless of where equities print the final low, we are comfortable expecting an equity market sharply higher than today over the next 12-24 months.


Market is in oversold territory, but can remain oversold for

extended periods of time

Recessionary conditions (not our base case)—support in the

2559-2235 range

PAGE 4 OF 13

PORTFOLIO STRATEGY

FEAR AND EXTREME INDICATORS ON THE RISE


% Of S&P 500 Stocks Above 10, 20,

50, & 200 DMA

Declining Volume As % Of Total

Put/Call Ratio

Short-term indicators are

extremely oversold

Intensity of selling is high with declining volume

reaching over 90% of total volume several times

this week; usually precedes a buying opportunity

(but not a signal for absolute bottom)

Put/Call Ratio

10DMA Put/Call Ratio is now above the

95th percentile of all data from 2000

CBOE Volatility Index (VIX)

Level that shows extreme fear on the part of investors, but below the financial crisis

high.

A confluence of "black swan" events acted as a catalyst to accelerate the waterfall sell-off this week and push the market into bear market territory: COVID-19 reaching pandemic status and an oil price war. However, we are approaching extremes as fear indicators spiked this week, which are useful only as signs the odds are elevated the market may be nearing a low for the short-term (but have historically not been useful at "picking" absolute lows).

PAGE 5 OF 13

PORTFOLIO STRATEGY

TECHNICAL: CONTAINING THE VIRUS IS KEY—IMPROVING RELATIVE PERFORMANCE IN CHINA Containing the virus is key. As seen below, China started to gain relative performance once the number of new cases peaked and total cases plateaued (if you can believe the data). In the U.S. the number of new cases will likely rise as the capacity of testing improves. In the near-term this likely continues to put pressure on U.S. equities. However, using China as a blueprint, investors will likely start discounting the recovery in the economy once new cases peak and total cases start to plateau.


Jan.

Trade war

COVID-19

COVID-19

80793

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1/2

1/2

02

0

1/2

3/2

02

0

1/2

5/2

02

0

1/2

7/2

02

0

1/2

9/2

02

0

1/3

1/2

02

0

2/2

/20

20

2/4

/20

20

2/6

/20

20

2/8

/20

20

2/1

0/2

02

0

2/1

2/2

02

0

2/1

4/2

02

0

2/1

6/2

02

0

2/1

8/2

02

0

2/2

0/2

02

0

2/2

2/2

02

0

2/2

4/2

02

0

2/2

6/2

02

0

2/2

8/2

02

0

3/1

/20

20

3/3

/20

20

3/5

/20

20

3/7

/20

20

3/9

/20

20

3/1

1/2

02

0

Coronavirus Cases (China)

New Cases Total Cases-China

February 20- China cases drop to

lowest in a month

February 13: New Cases peak at over

15k (after new testing standards)

February 23- Cases plateau near 80k

cases

PAGE 6 OF 13

PORTFOLIO STRATEGY

TECHNICAL: CONSTITUENTS OF S&P 500

In our view, the smartest purchases during the market correction are in the areas offering the most attractive risk vs. reward for an extended period (beyond 12 months). These are companies experiencing strong fundamental trends (and were leaders prior to the market correction). Stick with large cap, well-capitalized companies since they are better able to maintain dividends even in economic contractions and have performed better than the average stock within the S&P 500 during the pullback (equal-weight sector down nearly 30% from highs). With the S&P 500 now in bear market territory on a closing basis, we wanted to highlight sectors that continue to offer attractive opportunities. Selling has been indiscriminant with every sector declining over 19% from its 52-week high. Within the S&P 500 there are only 2 securities that have not fallen into contractionary territory (down over 10%). We see the Health Care and Technology sector offering the best risk-reward. The Health Care sector has seen the smallest decline (from its 52-week high) amongst sectors at 19.2%. Moreover, Health Care has 16 securities that have not slipped into bear market territory (or 30% of the names that haven’t fallen over 20%). This continues to be one of our favored sectors. Technology (down 26.8% from its 52-week high) was leading the market higher prior to the coronavirus. We would look at this sector as there are 40 securities that have declined between 30-50% from their respective 52-week highs. In the event, that this impact is transitory, this sharp pullback may offer attractive opportunities. For the more speculative traders, Energy, down 56.3% from its peak, may offer opportunities, but we are reluctant to go there yet as the sector was weak prior to the virus and has weakened further with every name down over 30% from its high.


S&P % Below 52-Week High -26.9%

S&P Equal-Weight % Below 52-Week High -29.8%

% from 52-Week High % of Stocks Number of Stocks

< (-10%) 0.4% 2

(-10%)-(-20%) 10.5% 53

(-20%)-(-30%) 28.9% 146

(-30%)-(-50%) 43.6% 220

> (-50%) 16.6% 84

Sector Total < (-10%) (-10%)-(-20%) (-20%)-(-30%) (-30%)-(-50%) > (-50%) % off 52-Week High

Consumer Discretionary 64 1 1 12 31 19 -26.9%

Consumer Staples 33 0 12 9 11 1 -19.3%

Energy 27 0 0 0 3 24 -56.3%

Industrials 71 0 3 24 35 9 -31.7%

Financials 66 0 1 13 43 9 -34.8%

Materials 28 0 2 6 12 8 -29.5%

Health Care 60 0 16 23 19 2 -19.2%

Information Technology 71 0 2 24 40 5 -26.8%

Communication Services 26 0 4 7 12 3 -25.2%

Utilities 28 0 7 13 7 1 -23.4%

Real Estate 31 1 5 15 7 3 -15.3%

% from 52-Week Highs

PAGE 7 OF 13

PORTFOLIO STRATEGY

TECHNICAL: 200 WEEK MOVING AVERAGE


The market broke through the 200-week moving average today. From a technical perspective, the 200-week moving average provided support during the 1987, 2011 and 2018 pullbacks. However, back during the Cuban Missile Crisis in 1962, the S&P 500 sold off (on a weekly basis) 12% below its 200-week moving average. If the S&P 500 trades 12% below the 200-week moving average, the support would be around the 2,322 level (or ~6% lower from today’s closing price) and just below the December 2018 low of 2346.58.

200-week moving average did not hold in 1962 sell-off (Cuban missile crisis) with the market falling ~12% below the 200-

week moving average

200-week moving average held during 1987, 2011, and 2018 sell-off

If S&P 500 trades 12% below 200-week moving average (as

seen during 1962 sell-off), support would be around 2322

(6% lower)

PAGE 8 OF 13

PORTFOLIO STRATEGY

BUYING MARKET TROUGHS AND MARKET PEAKS

Trying to pick a market bottom is tricky as markets tend to overshoot realistic fundamental and technical support levels during periods of panics and periods of euphoria. However, rather than selling now (which is likely closer to a market bottom), it is important to stay the course. Many investors feel as though selling now and moving back in when there is more comfort and certainty about the future is an appropriate strategy. However, markets are forward-looking, which cause bear markets to end violently, and tend to discount recoveries much earlier than investors would get back into the market. As seen in the chart below to the left (buying at market troughs), the annualized 1-year return following market bottoms tend to be outsized than the 9.94% average return since 1980. Most of the gains are made early in the recovery from the bottom, so missing out can be very costly to long-term total returns. Historically, recessionary Bear markets have seen average price declines of 33% (median 24%) and average price declines of 24% (median 22%) in non-recessionary periods (dating back to 1957). However, looking forward, from the low, equities return to new highs within 27 months of the low (median 12 months) during recessionary bear markets and an average of 11 months (median 11 months) following non-recessionary bear markets. We believe odds are high that equity markets will be higher within 12-24 months. Since market timing is difficult, we also looked at the annualized total returns of markets (through the end of 2019) when investors bought at market peaks. As seen below, there have still been solid returns for investors buying at markets peaks (which we were at less than a month ago).


Buying at Market Troughs Buying at Market Peaks

PAGE 9 OF 13

PORTFOLIO STRATEGY

TECHNICAL: Energy

The sell-off in the Energy market is extreme. The Energy sector has pulled back 56.3% from its 52-week high. However, it is likely still too early given the broken technicals and challenged fundamentals prior to the outbreak of COVID-19. Looking back to the sell-off in WTI back in 2016 when oil bottomed in the mid-20’s, the distance from the 200-DMA for the Energy sector was not this high (and today’s sell-off pushed the distance from the 200-DMA to the furthest in 20-year). Moreover, the Energy sector is trading sharply lower than the bottom seen in 2016, despite oil prices at ~$30/barrel vs. prices in the mid-20’s in 2016.


WTI Crude

Energy

M20-2994162

PAGE 10 OF 13

PORTFOLIO STRATEGY

IMPORTANT INVESTOR DISCLOSURESThis material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should notbe deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guaranteethat such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does notinclude all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individualsituation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts providedherein will prove to be correct.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject torapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile andthere may be sharp price fluctuations even during periods when prices overall are rising.

Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any ofthe listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regardingany websites users and/or members.

This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy,reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed,electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report forany unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual propertylaws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyrightclaimed in incorporated U.S. government works.

Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index iscomprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance,excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

The MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials,energy, and banks.

The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000of the largest U.S. stocks.

The NYSE Alerian MLP is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whoseconstituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMZ) and on atotal-return basis (AMZX).

PAGE 11 OF 13

PORTFOLIO STRATEGY

The Barclays Intermediate Government/Credit Bond index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment gradeU.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Euro Stoxx 50 Index is a market capitalization weighted stock index of 50 large, blue-chip European companies operating within Eurozone nations. Components areselected from the Euro STOXX Index which includes large-, mid- and small-cap stocks in the Eurozone.

The China CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghai and Shenzhen stockexchanges. It had a sub-indexes CSI 100 Index and CSI 200 Index.

The S&P 500 Futures is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in theaggregate market value of 500 stocks representing all major industries.

The DJIA Futures is a stock market index futures contract traded on the Chicago Mercantile Exchange`s Globex electronic trading platform. Dow Futures is based off the Dow30 stock index.

The Nasdaq 100 Futures is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international companies listed on theNASDAQ.

Europe: DAX (Deutscher Aktienindex (German stock index)) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt StockExchange.

Asia: Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index composed of Japan's top 225blue-chip companies traded on the Tokyo Stock Exchange.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investmentperformance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investmentyields will fluctuate with market conditions.

International Disclosures

For�clients�in�the�United�Kingdom:

For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use ofthe persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5)(Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any otherclass of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use byclients.

For�clients�in�France:

This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are EligibleCounterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to bedistributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individualsor those who would be classified as Retail Clients.

For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and theAutorite des Marches Financiers.

PAGE 12 OF 13

PORTFOLIO STRATEGY

For�institutional�clients�in�the�European�Economic�rea�(EE�)�outside�of�the�United�Kingdom:

This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

For�Canadian�clients:

This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there isCanadian contribution, the document meets all applicable IIROC disclosure requirements.

Broker Dealer Disclosures

Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is aregistered trademark of Raymond James Financial, Inc.

PAGE 13 OF 13

PORTFOLIO STRATEGY

Documents

Weekly Market Guide - Raymond James