before the bell · 2020-03-23 · quick take: after indicating sharp losses for the open of the...

Notations:

For further information on any of the topics mentioned, please contact your Financial Advisor. Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or

recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. of 14

Before the Bell Morning Market Brief

March 23, 2020

FOR IMPORTANT DISCLOSURES, PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist The selloff in equities accelerated last week. The S&P 500 fell 15 percent, its worst week since 2008, leaving the index down 32 percent from its February 19th high, and down 29 percent on the year. At the sector level, real estate was far and away the worst performer. Also notably weak were energy, industrial and financials. All eleven sectors were lower, with the best performer, consumer staples, still falling by 11 percent. For the week, the VIX index averaged 72. Treasury bond yields were lower on the week, as bond market volatility remained elevated. The ten-year yield fell 11 basis points to 0.85 percent, and the thirty-year bond yield fell 12 to 1.42 percent. High yield credit spreads widened sharply once again, rising 278 basis points to 1009. It was the fifth straight week of wider spreads that have climbed 653 basis points in that time, to their widest since 2009. The municipal bond market also remained under extreme pressure as selling accelerated, particularly at the shorter end of the yield curve.

The dollar surged higher as the demand for liquidity and safety remained unabated. The DXY index gained 4 percent last week alone, and is higher by 8 percent in the past two weeks. WTI crude oil fell $9.30 a barrel, or 29 percent.

The Federal Reserve activated facilities to improve liquidity in the market for short-term corporate funding. As it did during the financial crisis, the Fed last week launched a lending facility to buy commercial paper, a market where spreads have widened sharply amid the surge in demand for credit. In a related move, it also launched a facility to provide loans to the 24 primary dealers to ensure their ability to finance their securities positions. It also launched a lending facility to ensure sufficient liquidity among money market mutual funds. All of these actions followed the Fed’s full one percent reduction in the overnight rate at the start of the week, and the launch of a program to buy bonds in the treasury and mortgage-backed securities markets. Importantly, the Congress is also working on a bill to provide reportedly $2T in economic aid in response to the economic impact of the virus. The Senate is expected to vote on the bill on Monday, followed shortly after by the House, with enactment expected by mid-week. However, partisan negotiations were still underway late on Sunday.

It is estimated that roughly one-fourth of the U.S. population is now subject to various stay-at-home directives in an effort to slow the spread of the virus, and the number of documented infections continues to rise sharply, with 30,000 now estimated as of Sunday, March 22nd. Worldwide, the number of infections is estimated to exceed 300,000.

Increasingly, the flow of economic data is beginning to reflect the impact of the virus. Nowhere is that more likely than in this week’s report of new jobless claims on Thursday. Much was made of last week’s increase of 70,000 to a two-year high of 281,000. That will seem rather modest if this week’s Bloomberg consensus estimate of 1.5 million is even close to accurate. Also on this week’s calendar are the March flash reports on manufacturing and service activity, with

Before The Bell March 23, 2020 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. of 14

the former estimated to have slipped into contraction. February new home sales, durable goods orders, personal income and spending are also scheduled.

It remains too early to say with any confidence that we have seen the bottom in stocks. Despite stock prices being down almost one-third from the peak, the economic impact of the virus remains too uncertain to quantify. Estimates of the expected decline in second quarter GDP are being revised lower, and estimates of expected unemployment are being revised higher. And despite the central bank provision of a variety of funding programs, liquidity remains at a premium, causing persistent pricing distortions. In the weeks immediately ahead, the news on both the healthcare front and economic front is certain to get worse. We should be prepared for that. And orders to remain at home will certainly become increasingly tiresome. Eventually, however, things will get better. The spread of the virus will eventually begin to level off. Slowly the economy will come back to life. And stock and bond markets will begin to return to normal. No one can say with certainty how long this will take. But with perseverance we will get through this.

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global market Strategist Quick Take: After indicating sharp losses for the open of the U.S. session overnight, U.S. stock Index futures

turned sharply higher at 8:30 AM ET this morning after the Federal Reserve announced a host of massive new programs to support fiancial functioning; European markets are trading in the red; Asia ended significanlty lower overnight; West Texas Intermediate (WTI) oil trading at $23.50; 10-year U.S. Treasury yield slumping to 0.73%.

Unprecedented Times; Unprecedented Market Conditions: Last week, the S&P 500 Index fell nearly 15.0%, while the Dow Jones Industrials Average slumped over 17.0%. We’ll spare readers the blow-by-blow of events (you can always refer to last week’s Before The Bell for more detail), but by the end of trading on Friday, the S&P 500 had posted its worst week since October 2008. Last Monday, U.S. stocks suffered their worst one day drop since Black Monday in 1987.

There is little historical precedence for what the world is living through right now. As more businesses shutter, states enact further restrictions on movement, and increased focus/resources by states and the federal government turn towards addressing the health crisis, the economy will grind further into a halt. Attempting to anticipate the degree at which the economy will contract, or corporate profits will fall is simply guesswork at the moment. While investors generally look to technicals in such times, even this exercise has become less informative. We will say, however, the S&P 500 could look for some support around its December 2018 low of roughly 2350. A meaningful break below the December 2018 lows could signal more near-term selling pressure, in our view. Investors should have a better gauge on this front by the end of the week.

As the Ameriprise Financial chart below highlights, the speed at which stocks have fallen into a bear market is analogous to some degree with the drawdowns in 1929 and 1987. In both 1929 and 1987, the S&P 500 fell swiftly, like it is doing now. In each of those circumstances, the most severe and swift declines from the market tops happened inside the first 50 trading days. Also, both periods saw the S&P 500 quickly recover some of its losses over the next several months. But in the 1929 bear market, the S&P 500 took another strong leg down as the Great Depression started to take root. Yet, in 1987, the correction proved short-loved, and the S&P 500 eventually went on to recover more of what was lost during its sharp drawdown.

As we highlighted in our title, the market/economic circumstances today stand on their own and are unique. While the chart below can provide some context for the speed at which markets have fallen from an all-time high, time and clarity on the economic/corporate profit front will most likely dictate where stock prices go over the next several months.



As the FactSet chart below shows in stark detail, the Federal Reserve is back to expanding its balance sheet sharply. Just this month, the Fed’s balance sheet has moved from $4.2 trillion to nearly $4.7 trillion. At the end of September 2019, the Fed’s balance sheet stood at $3.9 trillion. At the moment, the Fed is pulling out its financial crisis playbook and making sure there is adequate liquidity in the markets that are systemically important to the economy. Investors should expect the Fed’s balance sheet to continue to expand at a rapid pace.

The Fed has quickly lowered interest rates to zero, and poured billions into the repurchase (repo) market as well as ensured adequate liquidity in money markets. While we expect the Fed could and will do more, they have wasted little time doing their part to help shore up the economy’s critical plumbing.

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Heading into the week, keep these points in mind: Right now, the market’s EKG is in cardiac arrest. Significant rallies in the market, and in association with

massive declines, especially in back-to-back days, likely do not signify anything meaningful for investors. Volatility is high and could likely remain high over the near-term. But VIX levels could start to move lower depending on how events play out this week regarding the government's response to COVID-19.

Federal Reserve members over the weekend suggested more could be done on the monetary front. On 60 Minutes, Minneapolis Fed President Neel Kashkari said the Fed should provide more direct support for the corporate and municipal bond markets. St. Lous Fed President James Bullard told Bloomberg, the Fed had more ammunition to boost Treasury holdings and warned the unemployment rate could skyrocket in the second quarter. This morning, the Federal Reserve said it would purchase Treasuries and mortgage-backed securities “in the amount needed” to support smooth market operations.

The political wrangling over a stimulus bill to stem the pain from an economy now approaching a full stop will not sit well with the market. Look for Republicans and Democrats to move through their differences quickly this week so they can finalize a bill that gets to President Trump’s desk for signature.

Unemployment claims could skyrocket this week and potentially counter other positive effects on the fiscal side this week. While the market has priced in a lot of negativity on the fundamental front, the jarring change in employment trends over the coming weeks could keep stock prices on the defensive near-term.

Asia-Pacific: Asian equities finished lower on Monday. Australia’s government announced a fiscal package to fight COVID-19 equaling roughly 4% of GDP. Also, the government shuttered non-essential services across the country to help slow the transmission of the disease and reduce stress on its healthcare system.

According to FactSet, Japan Prime Minister Shinzo Abe acknowledged the Tokyo Olympics this summer could be postponed. Per the Financial Times, discussions include alternate proposals that would push the Summer Olympics to 2021 or even further out. While nothing has been finalized, the International Olympic Committee has given itself four weeks to make a final decision about postponing the games in Tokyo

Europe: Markets across the region are trading in the red at mid-day. Italy has become the epicenter for the coronavirus, with nearly 60,000 infections and 5,400 deaths. Italy is in total lockdown, Spain extended its state of emergency by 15 days, and Germany banned meetings of more than two people. German Chancellor Angela Merkel entered self-isolation, per The New York Times.

U.S.: Equity futures reversed significant pre-market losses, turning solidly higher after the Fed said it would purchase assets in the amount needed to support the economy. Here’s a quick rundown to start your morning:

U.S. COVID-19 cases surpassed 35,000, while Ohio, Delaware, and Louisiana enacted “shelter in place” orders over the weekend. The three states join California, Illinois, and New York, which have also placed stricter measures on the movement of its citizens to help slow the transmission of the coronavirus.

Over the weekend, Senate Republicans failed to receive the necessary votes to clear a procedural hurdle that would pave the way for a roughly $2 trillion stimulus package (approximately 10% of GDP). Senate Democrats voiced concerns about the transparency of a loan program for businesses and wanted more aid for state and local governments as well as hospitals, per FactSet. Another procedural vote is scheduled for today. U.S. Treasury Secretary Steven Mnuchin said the “Phase 3” stimulus package under consideration by Congress is aimed at supporting the economy through the next 10-12 weeks.

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WORLD CAPITAL MARKETS 3/23/2020 As of: 8:30 AM ET

Americas % chg. % YTD Value Europe (Intra-day) % chg. %YTD Value Asia/Pacific (Last Night) % chg. %YTD ValueS&P 500 -4.34% -28.33% 2,304.9 DJSTOXX 50 (Europe) 1.25% -30.86% 2,580.5 Nikkei 225 (Japan) 2.02% -28.56% 16,887.8 Dow Jones -4.55% -32.41% 19,174.0 FTSE 100 (U.K.) -0.03% -30.38% 5,189.2 Hang Seng (Hong Kong) -4.86% -22.69% 21,696.1 NASDAQ Composite -3.79% -23.10% 6,879.5 DAX Index (Germany) 1.50% -31.60% 9,062.8 Korea Kospi 100 -5.34% -32.54% 1,482.5 Russell 2000 -4.24% -39.05% 1,013.9 CAC 40 (France) 0.75% -31.64% 4,079.4 Singapore STI -7.35% -30.31% 2,233.5 Brazil Bovespa -1.85% -42.00% 67,069 FTSE MIB (Italy) 0.28% -32.88% 15,776.7 Shanghai Comp. (China) -3.11% -12.78% 2,660.2 S&P/TSX Comp. (Canada) -2.62% -30.06% 11,851.8 IBEX 35 (Spain) 0.35% -32.02% 6,465.9 Bombay Sensex (India) -13.15% -36.86% 25,981.2 Mexico IPC -2.49% -21.22% 34,269.5 MOEX Index (Russia) -1.97% -24.74% 2,285.6 S&P/ASX 200 (Australia) -5.62% -30.89% 4,546.0

Global % chg. % YTD Value Developed International % chg. %YTD Value Emerging International % chg. %YTD ValueMSCI All-Country World Idx -1.69% -29.41% 397.1 MSCI EAFE 0.86% -31.18% 1,393.9 MSCI Emerging Mkts 4.80% -27.73% 803.2 Note: International market returns shown on a local currency basis. Equity index data is total return, inclusive of dividends.

S&P 500 Sectors % chg. % YTD Value Commodities Communication Services -4.63% -23.64% 138.3 Equity Income Indices % chg. % YTD Value Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Discretionary -2.71% -27.61% 711.3 JPM Alerian MLP Index 9.69% -58.26% 91.1 CRB Raw Industrials -0.04% -6.68% 421.6 Consumer Staples -6.53% -19.70% 516.3 FTSE NAREIT Comp. TR -4.34% -34.18% 14,054.7 NYMEX WTI Crude (p/bbl.) 1.81% -62.27% 23.0 Energy 0.96% -57.00% 193.9 DJ US Select Dividend -5.96% -37.19% 1,438.5 ICE Brent Crude (p/bbl.) -2.82% -60.27% 26.2 Financials -3.27% -38.54% 312.7 DJ Global Select Dividend -3.05% -42.56% 135.0 NYMEX Nat Gas (mmBtu) -1.81% -28.05% 1.6 Health Care -4.08% -22.54% 916.6 S&P Div. Aristocrats -5.76% -30.87% 2,120.6 Spot Gold (troy oz.) 0.90% -0.34% 1,512.1 Industrials -5.04% -36.96% 431.4 Spot Silver (troy oz.) 1.56% -28.22% 12.8

Materials -3.53% -33.79% 254.2 LME Copper (per ton) -0.31% -21.85% 4,805.3 Real Estate -5.48% -29.69% 168.0 Bond Indices % chg. % YTD Value LME Aluminum (per ton) -3.05% -12.49% 1,558.8 Technology -4.42% -22.07% 1,251.7 Barclays US Agg. Bond 0.63% 0.01% 2,225.3 CBOT Corn (cents p/bushel) 0.22% -12.73% 344.5 Utilities -8.18% -26.17% 240.6 Barclays HY Bond -0.61% -18.11% 1,787.4 CBOT Wheat (cents p/bushe 3.15% -0.98% 556.3

Foreign Exchange (Intra-day % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) 0.68% -4.03% 1.08 Japanese Yen ($/¥) 0.65% -1.45% 110.21 Canadian Dollar ($/C$) -0.22% -9.77% 1.44British Pound (£/$) -0.42% -12.65% 1.16 Australian Dollar (A$/$) 0.55% -17.15% 0.58 Swiss Franc ($/CHF) 0.36% -1.71% 0.98Data/Price Source: Bloomberg. Equity Index data is total return, inclusive of dividends, where applicable.

Ameriprise Global Asset Allocation Committee U.S. Equity Sector - Tactical View

S&P 500 GAAC GAAC S&P 500 GAAC GAAC

Index GAAC Tactical Recommended Index GAAC Tactical RecommendedSector Weight Tactical View Overlay Weight Sector Weight Tactical View Overlay Weight

1) Communication Services 10.5% Underweight - 2.0% 8.5% 6) Health Care 13.9% Equalweight - 13.9%

2) Consumer Discretionary 10.0% Overweight +2.0% 12.0% 7) Industrials 9.3% Equalweight - 9.3%

3) Consumer Staples 7.4% Equalweight - 7.4% 8) Information Technology 21.8% Overweight +2.0% 23.8%

4) Energy 4.6% Equalweight - 4.6% 9) Materials 2.7% Equalweight - 2.7%

5) Financials 13.1% Underweight - 2.0% 11.1% 10) Real Estate 3.2% Overweight +1.0% 4.2%

11) Utilities 3.5% Underweight - 1.0% 2.5%

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well

as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment

conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 9/20/19. Numbers may not add due to rounding.

Ameriprise Global Asset Allocation Committee Global Equity Region - Tactical View

MSCI All-Country GAAC GAAC MSCI All-Country GAAC GAAC

World Index GAAC Tactical Recommended World Index GAAC Tactical RecommendedRegion Weight Tactical View Overlay Weight Region Weight Tactical View Overlay Weight

1) United States 55.6% Overweight +7.3% 62.9% 5) Latin America 1.4% Equalweight - 1.4%

2) Canada 3.1% Equalweight - 3.1% 6) Asia-Pacific ex Japan 12.0% Equalweight - 12.0%

3) United Kingdom 4.8% Underweight - 2.0% 2.8% 7) Japan 7.3% Underweight - 2.0% 5.3%

4) Europe ex U.K. 14.5% Underweight - 2.0% 12.5% 8) Middle East / Africa 1.3% Underweight - 1.3% -

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as

Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in

each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 9/20/19. Numbers may not add due to rounding.



THE WEEK AHEAD: Russell T. Price, CFA, Chief Economist This week’s economic data: Estimating this week’s report on new claims for unemployment insurance has almost

become somewhat of a macabre parlor game. The same might be said for just how low real GDP for Q2 might be, how high the loss of nonfarm payrolls might become, or how historically high the unemployment rate may reach. Specifics aside, absent a miraculous vanishing act by the coronavirus over the near-term, the numbers are sure to be very, very bad for sure.

None of this is lost on financial markets, but neither is it particularly new information. There’s no doubt that the economic picture will be very bad over the near-term as activity has been brought to a near halt.

Last week, new unemployment claims for the week-ending March 14th came-in at 281,000, an increase of 70,000 over the preceding week. This week, we are forecasting 2.9 million new claims for unemployment insurance to have been filed for the week ending March 21st. How do we get to such an extreme number? A few states have announced their individual claim totals for the measurement period, despite the Trump Administration asking states to withhold their individual totals until the national report is released on Thursday. Pennsylvania said they expect to report 121,000 claims for the week, Michigan released a figure of 108,000 through Friday, Colorado estimated 180,000, and California reported new claims of 135,000 through Thursday. Combining the numbers, extrapolating for the days not reported by some of the states, and comparing the numbers to state population, equates to a number of approximately 0.93% of population for the four cited. Using this percentage relative to the entire U.S. population leaves a number of 3.05 million. We’ve made some other minor interpretive adjustments to generate our estimate of 2.9 million, but the difference is immaterial. By comparison, the worst of the Great Recession saw 651,000 new claims filed (in March 2009), but the entire year of 2009 showed an average of 572,000 per week.

March 23 24 25 26 27Markit Prelim. Mfg. Index Durable Goods Orders Initial Jobless Claims Personal Income & Spending

None New Home Sales Retail Sales - Mexico Advance Trade - Goods U of M Consumer Sentiment

Scheduled Richmond Fed Mfg. Index Jobseekers - France Q4 GDP - 2nd Estimate Employment - Canada

Retail Sales - Brazil Inflation - U.K. Wholesale Inventories Trade - Mexico

Retail Sales - U.K.

Consumer Sentiment - S. Korea

Monetary Policy - U.K.

Employment - Mexico



Where Market Fundamentals Stand Heading into The Week:

S&P 500 Trailing and Forward P/E valuations: Source: FactSet Please note: Although we try to maintain consistency as much as possible, Price to Earnings (P/E) ratios may differ modestly from once source to another. Most notably, P/E numbers can often show their most notable differences during an earnings release season as some sources may still use the last full ‘actual’ earnings number (for instance, currently Q2 trailing 12-month earnings per share) while others use earnings per share that are updated for Q3 using a combination of actual and estimated earnings per share. The calculation of earnings (operating earnings versus ‘as reported’ or GAAP) also often differs modestly from one data source to another due to the proprietary use of calculation methodologies. The “average” shown in the charts below represent averages for the period shown.



Please note: the consensus earnings estimates shown below should NOT be relied upon. In this VERY dynamic and rapidly changing environment, analysts have very likely not had time to catch-up to the reality of the situation and they may not for some time. Ultimately, we believe aggregate earnings for S&P 500 companies are likely to be negative in either Q1 or Q2 or both. By comparison, S&P 500 earnings per share were negative in just one quarter during the Great Recession, posting an EPS loss of 2.42 in Q4-2008.

Consensus Earnings Estimates: Source: FactSet

ECONOMIC NEWS OUT TODAY: Economic Releases for Monday, March 23, 2020. All times Eastern. Consensus estimates via Bloomberg. None scheduled Economic Perspective: Russell T. Price, CFA – Chief Economist Just how bad WILL the economic picture get? Very. BUT… Over the weekend, there was a new round of even

deeper predictions as to just how bad economic data is likely to get in this country over the next few months. The numbers for virtually all metrics have been cascading lower, lower, and lower over the last few weeks, as forecasters slowly come to terms with what a “hard stop” really means for the economy.

St. Louis Fed President Bullard said the unemployment rate could hit 30%, Morgan Stanley this morning projected Q2 real GDP of -30% (though remarkably, they still see full-year growth as slightly positive), and most forecasts for this week’s report on new unemployment claims are coalescing their estimates around a number of approximately 3 million – for the week.

Unfortunately, we believe the estimates for GDP and unemployment claims are likely to prove generally accurate. In fact, there could be further downside to both. We disagree, however, with the unemployment number as put for by James Bullard, but primarily due to a technicality – you don’t count as “unemployed” if you are not looking for work. And in the current circumstances, there’s no reason to look.

As we’ve mentioned, however, we believe the near-term data should be ignored – and we believe financial markets will largely look past it as well (though certainly not without some serious rubbernecking simply due to the historical nature of it all). It’s not that investors should stick their heads in the sand and pretend this isn’t happening. It’s that markets will likely, and should, focus on the horizon – the eventual return to normal life that will come.

To date, U.S. equity markets have adjusted lower by about 30% in reflection of this situation – and there very well could be added downside. But rather than looking at the backward-looking economic data, we believe markets will maintain their focus on the virus, and the success or failures in getting it under control. In this respect, we believe there were also some encouraging reports over the weekend relative to potential treatments and therapies for improving outcomes for those that contract the virus. There were also positive reports on the availability and speed of testing supplies and equipment, as well as some encouraging news related to availability of basic medical supplies needed on the front lines. This is a very serious and difficult situation; but one the world, and the world economy, will undoubtedly overcome, in our view.

S&P 500 Earnings Estimates 2015 2016 2017 2021

3/23/2020 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est. Est. Est.Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Quarterly $$ amount $38.72 $41.13 $42.88 $41.32 $38.80 $41.59 $42.21 $41.78 $38.02 $40.67 $43.81 $45.10

change over last week -$0.59 -$1.61 -$1.41 -$1.04

yr/yr 25.4% 25.4% 27.8% 13.7% 0.2% 1.1% -1.6% 1.1% -2.0% -2.2% 3.8% 7.9%

qtr/qtr -1% 6% 4% -4% -6% 7% 1% -1% -9% 7% 8% 3%

Trailing 4 quarters $$ $118.67 $119.64 $133.50 $141.41 $149.74 $159.07 $164.05 $164.13 $164.59 $163.92 $164.38 $163.60 $162.68 $164.28 $167.60 $189.90

yr/yr -0.3% 0.8% 11.6% 22.9% 0.2% 2.0% 13.3%

Implied P/E based on a S&P 500 level of: 2305 14.0 14.1 14.2 14.0 13.8 12.1

2019 20202018



FIXED INCOME NEWS & VIEWS: Brian M. Erickson, CFA, Fixed Income Research & Strategy

Congressional Divide and Expanding Global Shutdown Adds Bid to Treasuries This Morning Congress continues to haggle over how to structure the massive, $2 trillion fiscal stimulus to offset the economic

impact of closing businesses and the expansion of travel restrictions. We anticipate Congress ultimately arrives at a solution, yet this morning Treasury markets channels the angst of partisan divide.

Geopolitical tensions still on simmer: In the near-term, markets shifted toward a domestic focus and away from the geopolitical tensions that led uncertainty last year. While the focus on domestic policies and our response to the spread of the virus draws focus today, we note the trade divide between the U.S. and China, as well as the U.S. and Europe remains below the surface. A time of crisis can bring parties together or further expand division. At this point, we see a divide persisting and potentially growing wider; a dynamic that could return to the forefront in the second half of the year.

Treasury Sell-off Fades; Correlation Re-emerges Treasury yields declined across 5-year, 10-year, and 30-year Treasuries (see chart below right). Many investors

questioned the ability for Treasuries to be the negatively correlated diversifier for portfolios. The chart below right shows the price movements of 10-year Treasuries day by day. Through March 9, Treasury prices rose, providing strong positive returns as equities sold off. Beginning March 10, we believe markets shifted to selling what could be sold, and that short list included Treasuries that held strong returns. This resulted in 10-year Treasury prices bottoming at $102-07 on March 18. We believe the Fed’s expanding list for liquidity support likely eases the recent sell pressure on Treasuries. The rebound in 10-year Treasury prices through this morning to $107-18 after the Fed announced expanded Quantitative Easing (QE).

Through March 9, the Bloomberg Barclays U.S. Aggregate Index (U.S. Aggregate) posted a 6.0% total return. By last Thursday, the year to date total return deteriorated to -0.6%; falling -4.2% on a total return basis. As of Friday, the U.S. Aggregate’s total return rotated back to flat year to date and could end the day back in positive territory in our view.

We see the sharp drop in business activity that likely shows up in economic data this week and next maintains a bid for Treasuries, while the addition of global monetary and fiscal support likely offsets a return to recent Treasury high prices. We believe the technical sell pressure on Treasuries eases and demand for U.S. Treasuries sustains over the course of the year, and recommend investors stay the course on portfolio diversification.

Fed Response = Massive Since February 28 (A Little More Than Three weeks!) Since February 28, a little more than three weeks, the Fed employed rapid response tools including cutting fed funds,

reintroduced quantitative easing (QE) and cut required bank reserves. In addition, the Fed reinstated the Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), and the Money Market Liquidity Facility (MMLF). Finally, the Fed quelled currency squeezes by expanding swap lines with foreign central banks. See the chart below.

New tools announced at the end of last week: The Fed added 9 counterparties to its list of dollar swap line counterparties. Demand for dollars led to a stronger U.S. dollar and weakness in foreign currencies. As a result, companies and nations with debt denominated in U.S. dollars want to stockpile dollars to hedge currency risk.

Fed added a money market financing facility on Wednesday. Similar to the Commercial Paper Financing Facility outlined earlier in the week, the facility aims to add liquidity to asset money market funds typically hold to ensure a liquidity pinch does not put retail and government money market funds at risk of breaking the buck. We believe the



Fed’s actions will be sufficient to support the market. The question is not the potential for losses from credit, rather losses from liquidity that may be averted by the new facility

More the Fed can do: The Fed continues to move items from the right-hand column of the chart below to the left-hand column. This morning just ahead of the open to U.S. equity markets, the Federal Reserve moved a few items from the right column below to the left column of the chart below. The Fed expanded QE to QE unlimited ensuring bulk sales of Treasuries impact market liquidity to a minimal degree. Open-ended purchases encompass both Treasuries and agency mortgage backed securities. In additional, the Fed is setting up a credit support facility for small businesses to support initiatives by the Small Business Administration (SBA). Those two programs: A Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

Fed signaling also suggests support for municipal markets as well, which could be formally expanded by legislation enabling the Fed to participate in municipal markets beyond the short-term. The Feds role has morphed from lender of last resort to dealer of last resort, stepping into intermediate markets where Wall Street dealers come up short. The Fed stepped directly into private asset markets, a stark difference to the post-financial crisis where the Fed’s balance sheet drew the line at first loss risk to corporate issuers.

Why the Fed doesn’t see negative rates as an effective tool here in the U.S.: On Sunday, March 15 Federal Reserve Chairman Powell stated that “We do not see negative policy rates as likely to be an appropriate policy response here in the United States.” We believe negative rates pose greater challenges and less stimulus for more market-centered funding approach of U.S. capital markets compared to the banking centric approach in Europe. As a result, we believe the Fed relies to a greater degree on its balance sheet and potentially the supply of money through the course of the contraction.

Strategy in Fixed Income We believe the near-term dislocation will pass. But it will make way for the reality that fixed income markets are on

different footing spanning Fed support for high-quality asset markets and the potential for defaults on riskier positions.

From a credit perspective, we are looking for stabilization in the virus spread for when bond markets will have the necessary starting point for assessing downgrades and defaults. Ultimately the virus drives timing for how long a activity shut-down lasts and the worst of the impact on companies may have passed. Once investors can gauge the impact on credit sectors, we believe some of the flight to quality may recede. We do not expect this until at least mid-Q2 at the earliest. Still too early to buy high yield in our view. Need to understand the actual financial backdrop of fiscal support and prospects for near-term demand before a clear buy decision can be made on corporate sectors. That said, we believe there are selective opportunities to add solid Investment Grade Corporate Bonds based on the liquidity pinch unfolding. See our Corporate Bond Recommended List or Starting Point Fund List for active managers that fit this profile.

Until then we believe Treasuries likely maintain a solid bid and anticipate Treasury yields to fall toward lows as the impact on activity unfolds. The Fed’s massive support is front end loaded and should counter large scale selling to boost liquidity.

Implications for investors: Be patient. Stay the course – High Quality fixed income will remain a sound diversifier over the next quarter or two in our view.

Federal Reserve PolicyAlready in Place Future ToolsCut fed funds target by 1.50% to near zero QE - Add more scaleRepo - Offered trillions of support QE - Expand to include corporate bondsDiscount window - Lowered rate; extended term up to 90 days Sharpen forward guidanceDollar swaps - expanded standing curreny swaps to central banks Restart Term Auction Facility (TAF)Cut reserve requirement ratio Restart Term Asset-backed Loan Facility (TALF)QE - Shifted $60 billion/month out across the curve Bank regulation - Extend new loss recognition rulesQE - Increased capacity by $500 billion of Treasuries Expanding money supplyQE - Added $200 billion of agency mortgage capacityRestarted the Commercial Paper Funding Faciliity (CPFF)Restarted the Primary Dealer Credit Facility (PDCF)Introduced a Money Market Liquidity Facility (MMLF)Source: American Enterprise Investment Services, Inc.



Ameriprise Investment Research Group Ameriprise Financial 1441 West Long Lake Road, Suite 250, Troy, MI 48098 [email protected] For additional information or to locate your nearest branch office, visit ameriprise.com RESEARCH & DUE DILIGENCE LEADER

Lyle B. Schonberger - Vice President Business Unit Compliance Liaison (BUCL)

Jeff Carlson, CLU, ChFC – Manager

Investment Research Coordinator Kimberly K. Shores Sr Administrative Assistant Jillian Willis EQUITY RESEARCH Equity Research Director Justin H. Burgin – Vice President

Consumer Goods and Services Patrick S. Diedrickson, CFA – Director

Energy/Utilities William Foley, ASIP – Director

Financial Services/REITs Lori Wilking-Przekop – Sr Director

Health Care Daniel Garofalo – Director

Industrials/Materials Frederick M. Schultz – Director

Technology/Telecommunication Open – Director

Quantitative Strategies/International Andrew R. Heaney, CFA – Director

STRATEGISTS CHIEF MARKET STRATEGIST David M. Joy – Vice President GLOBAL MARKET STRATEGIST Anthony M. Saglimbene – Vice President

Thomas Crandall, CFA, CMT, CAIA – Sr Director, Asset Allocation

Cedric Buermann Jr., CFA – Analyst, Asset Allocation Gaurav Sawhney – Research Analyst

Amit Tiwari, CFA – Sr Research Associate CHIEF ECONOMIST Russell T. Price, CFA – Vice President MANAGER RESEARCH

Michael V. Jastrow, CFA – Vice President

Jeffrey R. Lindell, CFA – Director – ETFs & CEFs

Mark Phelps, CFA – Director – Multi-Asset Solutions Equities Christine A. Pederson, CAIA, CIMA – Sr Director – Growth Equity, Infrastructure & REIT

Benjamin L. Becker, CFA – Director – International/Global Equity

Alex Zachman, CFA – Analyst – Core Equity

Cynthia Tupy, CFA – Director – Value and Equity Income Equity Fixed Income & Alternatives Jay C. Untiedt, CFA, CAIA – Sr Director – Alternatives

Steven T. Pope, CFA, CFP® – Director – Non-Core Fixed Income

Douglas D. Noah, CFA – Analyst – Core Taxable & Tax-Exempt Fixed Income

Blake Hockert – Associate – Reporting & Analytics

FIXED INCOME RESEARCH & STRATEGY

Fixed Income Research Brian M. Erickson, CFA – Vice President High Yield and Investment Grade Credit Jon Kyle Cartwright – Sr Director

Stephen Tufo – Director INVESTMENT DUE DILIGENCE

Justin E. Bell, CFA – Vice President

Kurt J. Merkle, CFA, CFP®, CAIA – Sr. Director

Kay S. Nachampassak – Director

Peter W. LaFontaine – Sr. Analyst

James P. Johnson, CFA, CFP® – Sr. Analyst

David Hauge, CFA – Analyst

Bishnu Dhar – Sr. Research Analyst

Parveen Vedi – Sr. Research Associate

Darakshan Ali – Research Process Trainee

INNOVATION AND DEVELOPMENT

Allen Rodrigues – Vice President

Nidhi Khandelwal – Director

Dan Burns – Sr. Manager

Matt Morgan – Sr. Manager

Natasha Wayland – Sr. Manager



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before the bell · 2020-03-23 · quick take: after indicating sharp losses for the open of the...

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