finance

August 26, 2020 U.S. Investment Policy Notes

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Economic and Stock Market Outlooks

Recommended Moderate Allocation

45%

10%

30%

15%

45% U.S. Equities

10% Cash

30% Bonds

15% Foreign Equities

S&P 500 EPS Changes as of 08/25/20

S&P 500 Sectors Q2E Q3E 2020E 2021E Comm. Services (21.7) (22.5) (18.3) 23.2 Consumer Disc. (68.0) (40.4) (47.5) 84.6 Consumer Staples (5.3) (6.9) (2.1) 9.3 Energy (169.4) (108.6) (103.5) NM Financials (51.1) (27.3) (32.1) 24.3 Health Care 1.5 (6.0) 0.5 14.6 Industrials (80.8) (61.7) (52.5) 88.1 Info. Technology 1.7 (3.2) 1.4 16.2 Materials (29.3) (20.2) (18.3) 30.2 Real Estate (47.4) (47.6) (34.2) (1.5) Utilities 6.0 (4.5) 0.9 3.9 S&P 500 (33.9) (24.5) (21.4) 27.2

S&P 500 EPS Growth Estimates Year-Over-Year % Changes

Targets

S&P 500 EPS 2020E: 128.89 2021E: 163.92 S&P 500 Revs. 2020E: -4.3% 2021E: 8.4% Real GDP Grth. 2020E: -4.0% 2021E: 5.3% Core PCE 2020E: 1.4% 2021E: 1.8% Fed Funds Rate 2020E: 0.38% 2021E: 0.13% 10-Year T-Note 2020E: 0.80% 2021E: 0.98% Exchange Rate 2020E: 109.4 2021E: 106.5 WTI Avg. ($) 2020E: 39.62 2021E: 44.26

12-Month S&P 500: 3650

Overall Outlook

Through August 25, the S&P 500 gained 1.6% in price after setting a post-bear market, new all-time high on August 18, outpaced by its Growth Index, along with the communication services and tech sectors. Five other sectors, as well as 60% of its sub-industries, also rose in price. Traditionally, the “500” advanced an average 5.2% following post-bear market highs, before slipping into another decline of 5% or more 2-1/2 months later, implying that the timing of a potential pullback would coincide with the upcoming election. Even though these subsequent declines averaged 8%, slipping between 5% and 14%, none signaled the start of a new bear market. Indeed, the bull market remained alive for an additional 37 months, on average, and a median of 24 months.

Economic Update

The global recovery continues to track a “V” rebound from the April lows. Not surprisingly, however, there remains a considerable variation in the height of the projected bounce, and uncertainty over the trajectory into Q4 and beyond. While the path of the pandemic remains the underlying key to the recovery, central bank events, economic data, and politics will help shape growth expectations over the rest of the quarter, according to Action Economics (AE). Markets are anticipating a dovish lean from Fed Chairman Powell at his virtual keynote Jackson Hole address on Thursday, although there is a risk for disappointment in terms of how much he can signal given the FOMC has yet to complete its Policy Framework Review, as well as its desire to let inflation heat up.

Fundamental Update

S&P Dow Jones Indices recently reported that with the Q2 reporting period nearly complete, share buybacks are running 56% below that of Q1 2020 and 45.8% below year-ago expenditures. Also, 199 issues reported no buybacks, compared with 97 in Q1,’20. As a result, the top 20 companies accounted for 88.8% of all S&P 500 buybacks; the 10-year average for the top 20 is 44.6%. Buybacks from the financials sector declined 81.9% from Q1,’20 and 77.7% from Q2,’19; ex Berkshire’s $5.0B expenditure, it is 92.5% and 90.9%, respectively, and Q3,’20 sector buybacks are not expected to improve, as the big-banks have suspended buybacks for that period. Communication Services is the only sector to record an increase, up 37.7% over Q1,’20, thanks to T-Mobile’s (TMUS 115 *****) $17.1 billion in connection with the SoftBank Monetization. Absent that, the sector would be down 47.5%. Tech buybacks fell 38.9% over Q1,’20, but continues to have the highest level of buybacks, accounting for 41.2% of all S&P 500 buybacks.

Technical Update

The breadth readings vs. price action in the S&P 500 (SPX) is notable and a cause for concern for bulls, according to i10Research. Even though the SPX is setting new all-time highs, and its bias remains bullish, the internals are showing signs of substantial vulnerability. On any pullback in the SPX, support is at 3212-3259 and the bias will remain bullish while above this zone. The Nasdaq-100 also remains bullish with support on any pullback at 10,5745. The bias will remain bullish on any deeper pullback while above lower support 10,370. The Russell 2000 bias is bullish with a next upside target at 1652-1669. Nearby support on any pullback is at 1539 and only a failure to maintain above this level would negate the bullish bias.

NTM P/E to Actual % Change P/E on Proj. 5-Yr. Sector % Sector Over/Under

S&P 500 Sector MTD YTD 2019 NTM EPS EPS Grth. Weightings Emphasis Weight Comm. Services 6.6 12.5 30.9 24.5 1.6 11.0 Overweight 1.0% Consumer Disc. 7.9 25.4 26.2 38.6 2.0 11.4 Marketweight 0.0% Consumer Staples 3.2 2.4 24.0 21.4 3.3 6.9 Overweight 1.0% Energy 0.3 (40.2) 7.6 57.2 NM 2.5 Underweight -1.0% Financials 3.7 (19.1) 29.2 14.4 1.7 9.7 Underweight -1.0% Health Care 1.3 4.8 18.7 17.2 1.7 14.0 Overweight 1.0% Industrials 8.2 (4.7) 26.8 27.3 3.2 8.2 Marketweight 0.0% Info. Technology 8.1 30.4 48.0 27.8 2.1 28.2 Overweight 1.0% Materials 3.8 2.2 21.9 22.0 1.5 2.5 Marketweight 0.0% Real Estate (0.6) (7.0) 24.9 56.7 7.0 2.6 Underweight -1.0% Utilities (2.8) (8.5) 22.2 18.6 3.1 2.9 Underweight -1.0% S&P Composite 1500 5.2 5.3 28.3 23.6 2.0 S&P 500 5.3 6.6 28.9 23.6 2.0 Sector recommendations are market- S&P MidCap 400 3.9 (6.2) 24.1 29.7 2.0 cap weighted, influenced by economic, S&P SmallCap 600 5.2 (10.9) 20.9 17.9 2.3 fundamental, and technical considerations. Source: S&P Capital IQ. NTM - Next 12 Months

Recommended

S&P 500 GICS Sector Performance and Recommended Sector Weightings 08/25/20

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Glossary

STARS Ranking system and definition:

««««« 5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

««««¶ 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

«««¶¶ 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

««¶¶¶ 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price not anticipated to show a gain.

«¶¶¶¶ 1-STAR (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

CFRA Ranking Definitions: Overweight rankings are assigned to approximately the top quartile of the asset class. Marketweight rankings are assigned to approximately the second and third quartiles of the asset class. Underweight rankings are assigned to approximately the bottom quartile of the asset class.

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