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    4. Wealth Management Insights April 2020

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    Wealth Management Insights April 2020

    April 15, 2020

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    Given present market volatility and economic uncertainty, we are cautiously neutral on the outlook. We are focusing on a few key factors that will enable us to determine what direction global markets and economies will take in the upcoming months. The factors that we are scrutinizing closely are outlined below.

    The S&P 500 posted the strongest 13-day rally in its history, up ~25% through week ending 4/10. The recent rally came off of extremely oversold levels as the market declined more than 35% from its peak on February 19 to its most recent low on March 23, the quickest bear market in history.

    Investors are now debating whether the market has moved up too quickly and there is concern that a pullback or consolidation may lie ahead in the next few weeks and months. While market-based indicators appear to suggest that the financial markets may be stabilizing, worldwide economic activity is still in freefall. Estimates for second quarter U.S. GDP range from -15% to -35% while estimates for global growth are continuing to fall.

    Given present market volatility and economic uncertainty, we are cautiously neutral on the outlook. We are focusing on a few key factors that will enable us to determine what direction global markets and economies will take in the upcoming months. The factors that we are scrutinizing closely are outlined below.

    Global infection rates

    • Resolving what brought us into this crisis will most certainly be a large part of what brings us out. From an investment standpoint, we need to see a decrease in infection rates domestically and internationally.
    • We have seen a deceleration in new cases in both the U.S. and Europe in the most recent week, implying that lockdowns/quarantines are working.
    • It is important that this downward trend continues in the weeks and months ahead. If it proves to be a temporary dip, financial market volatility will remain near historical levels as the unknown duration of the pandemic prolongs investor uncertainty.

    Additional monetary and fiscal policy responses

    • A significant portion of the recent stock rally can be attributed to the unprecedented monetary and fiscal policy support that has been provided, both domestically and internationally, to offset the economic impact of COVID-19.
    • In the U.S., monetary and fiscal policy actions have amounted to 35% of GDP, far exceeding any previous levels. Globally, the collective stimulus amounts to 20% of worldwide GDP.
    • These measures have temporarily ameliorated investor concerns around liquidity (ability to access cash) and solvency (ability to pay bills). We will continue to monitor economic and financial market trends and how central banks and governments shape their respective responses.

    Credit spreads

    • Credit spreads—the difference in yields between various private debt instruments and risk-free government securities of comparable maturity—are an important gauge of the degree of strains in the financial system. In addition, the movements in credit spreads can provide important signals regarding the evolution of the real economy and risks to the economic outlook.
    • The wide-ranging, rapid, and significant actions by the Federal Reserve have served to restore the flow of credit to numerous economic stakeholders, driving down the perceived risk of financing economic activity.
    • Moving forward, we look for continued stabilization or downward moves in credit spreads as a sign that financial conditions are improving.

    Jobless claims

    • Last week’s initial unemployment claim figure of 6+ million workers shattered previous records (previous high was 690K in 1982). It is likely that the future trend in the number of initial unemployment claims will begin to decline given the unprecedented surge following large scale lockdowns/quarantines.
    • More importantly, continuing jobless claims represent employees who are continuing to file for unemployment insurance on a week-to-week basis and have not yet returned to a job. Trends in this series provide information about the duration of time of those who remain unemployed. This is especially important as it will provide insight as to whether the economic impact is temporary or longer-lasting.
    • For mid and small companies, their ability to access and benefit from the Payroll Protection Program (PPP) under the CARES Act will prove critical to maintaining their payrolls and potentially reduce continuing jobless claims.

    First quarter 2020 corporate earnings and forward guidance

    • Beginning this week, S&P 500 companies will announce their Q1 2020 sales and earnings results.
    • While investors have already taken into account a decline in Q1 earnings (-8% year-over-year) along with a 14% decline for Q2 results, the more important information will come from management commentaries as to the current business landscape and how executives are managing cost structures/balance sheets.
    • A few items we’ll be focusing on include: (a) revenue commentary, (b) expense management (fixed/variable costs, labor), (c) balance sheet strength (use of credit facilities, dividends, buybacks), and (d) forward guidance.

    Outline(s) for how to begin to reopen economies

    • With recent data demonstrating slow progress in flattening the new infection curve, serious conversations about reopening economies have begun. The manner and pace in which economies reopen will dictate the success and strength of any ensuing recovery.
    • How critical will increased testing be when determining how the economy reopens? Will antibody tests impact who is allowed to return to work? Will there be certain sectors or geographies that are permitted to reopen sooner than others?
    • Using China as a simple guide or playbook, it is likely that domestic and European economies will be reopened in phases and growth in economic activity will likely start off slow.
    • We will be closely watching and scrutinizing the proposals and eventual paths that governments decide to take to reopen their economies.

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    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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