Economic & Market Outlook - Cerity Partners · Euro Debt Crisis Part II / S&P U.S. Debt Downgrade....

Confidential & Proprietary

Economic & Market OutlookMarch 5, 2020

Presented by

Benjamin A. Pace, III

Chief Investment Officer

Jim Lebenthal

Chief Equity Strategist

Tom Cohn

Partner



Key Points

2

1. Coronavirus has slowed global growth, expect a U-shaped recovery

2. No recession in the U.S.

3. Europe and Asia may dip into a recession

4. Lowered expectations for interest rates

5. Focusing on asset allocation for the long term with potential tactical tilts



The Current Correction – Been There Before

3

Source: IMF, Factset

The recent sell-off reflects a downgrading of global growth due to the impact of the coronavirus, but we expect business earnings to recover in the back half of 2020.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

S&P 500

Corrections S&P 500 - Price

-12.8%

-19.8%-10.2%

-14.2%

-19.4%-16.0%

VIX Product Implosion

Trade War Concerns

Coronavirus

Euro Debt Crisis Part I

Euro Debt Crisis Part

II / S&P U.S. Debt

Downgrade

Yuan Devaluation/Oil High-Yield Scare



Global Growth Estimates Coming DownAnalysts have lowered their 2020 economic forecasts to reflect the expected demand and supply slowdowns in Q1 and Q2.

4

Source: Factset

2.0%1.7%

1.5%

0.3%

1.3%

2.9%

7.3%

1.6%1.3%

0.6% 0.8%

1.4%

2.3%

6.1%

1.6%1.2%

0.7%0.5%

1.0%

1.8%

5.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Canada France Germany Japan United Kingdom United States China

Major Economy Real Growth Rates

2018 2019 2020 (estimates)



No U.S. Recession in 2020Another mid-cycle slowdown driven by a reduction in capital expenditures

5

Source: Factset

Mid-Cycle Slowdown

Mid-Cycle Slowdown

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Mar-10 Jun-13 Sep-16 Dec-19

Real Investment Growth

Real Private Residential Fixed Investment Real Private Nonresidential Fixed Investment



Housing Market ReboundLooser monetary policy is already flowing through to the housing market.

6

0

200

400

600

800

1,000

1,200

1,400

Jun-63 Jun-69 Jun-75 Jun-81 Jun-87 Jun-93 Jun-99 Jun-05 Jun-11 Jun-17

Housing Market Still Recovering

Recession New Residential Sales, New Houses Sold (thousands) Six Month Average

Source: Factset



Flat Earnings for 2020Expect further cuts in the estimates for Q1 and Q2 earnings, followed by a U-shaped recovery in Q3 and Q4.

7

25.6%24.7%

27.1%

14.6%

0.9% 1.5%

-1.2%

1.6% 1.4%

4.7%

9.3%

11.7%

-5%

0%

5%

10%

15%

20%

25%

30%

Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019(88%

reported)

Q1 2020 Q2 2020 Q3 2020 Q4 2020

Factset Quarterly S&P 500 Operating Earnings per Share Growth Rates

Actual EstimatesSource: Factset



Economic Data Has Yet to Reflect the Coming SlowdownChina’s February economic data offers a glimpse into the decline in fundamentals that should hit the rest of Asia and Europe in March and April.

8

Source: Factset

Manufacutring PMIs Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20

World 50.5 50.4 49.8 49.4 49.3 49.5 49.8 49.9 50.3 50.1 50.4 47.2

United States 52.4 52.6 50.5 50.6 50.4 50.3 51.1 51.3 52.6 52.4 51.9 50.7

Brazil 52.8 51.5 50.2 51.0 49.9 52.5 53.4 52.2 52.9 50.2 51.0 52.3

Canada 50.5 49.7 49.1 49.2 50.2 49.1 51.0 51.2 51.4 50.4 50.6 51.8

Mexico 49.8 50.1 50.0 49.2 49.8 49.0 49.1 50.4 48.0 47.1 49.0 50.0

China 50.8 50.2 50.2 49.4 49.9 50.4 51.4 51.7 51.8 51.5 51.1 40.3

India 52.6 51.8 52.7 52.1 52.5 51.4 51.4 50.6 51.2 52.7 55.3 54.5

Japan 49.2 50.2 49.8 49.3 49.4 49.3 48.9 48.4 48.9 48.4 48.8 47.8

South Korea 48.8 50.2 48.4 47.5 47.3 49.0 48.0 48.4 49.4 50.1 49.8 48.7

France 49.7 50.0 50.6 51.9 49.7 51.1 50.1 50.7 51.7 50.4 51.1 49.8

Germany 44.1 44.4 44.3 45.0 43.2 43.5 41.7 42.1 44.1 43.7 45.3 48.0

Italy 47.4 49.1 49.7 48.4 48.5 48.7 47.8 47.7 47.6 46.2 48.9 48.7

Spain 50.9 51.8 50.1 47.9 48.2 48.8 47.7 46.8 47.5 47.4 48.5 50.4

United Kingdom 55.1 53.1 49.4 48.0 48.0 47.4 48.3 49.6 48.9 47.5 50.0 51.7

Russia 52.8 51.8 49.8 48.6 49.3 49.1 46.3 47.2 45.6 47.5 47.9 48.2


Sheet1 (2)

PMI Report on Manufacturing - WorldFactSet

Percent

Markit Economics

03/29/201904/30/201905/31/201906/28/201907/31/201908/30/201909/30/201910/31/201911/29/201912/31/201901/31/202002/28/2020

World50.550.449.849.449.349.549.849.950.350.150.447.2

Americas

United States52.452.650.550.650.450.351.151.352.652.451.950.7

Brazil52.851.550.251.049.952.553.452.252.950.251.052.3

Canada50.549.749.149.250.249.151.051.251.450.450.651.8

Mexico49.850.150.049.249.849.049.150.448.047.149.050.0

Asia Pacific

Australia52.050.951.052.051.650.950.350.049.949.249.650.2

China50.850.250.249.449.950.451.451.751.851.551.140.3

India52.651.852.752.152.551.451.450.651.252.755.354.5

Indonesia51.250.451.650.649.649.049.147.748.249.549.351.9

Japan49.250.249.849.349.449.348.948.448.948.448.847.8

New Zealand51.652.750.351.248.348.748.852.651.249.249.6-

Singapore50.850.349.949.649.849.949.549.649.850.150.348.7

South Korea48.850.248.447.547.349.048.048.449.450.149.848.7

Taiwan49.048.248.445.548.147.950.049.849.850.851.849.9

Vietnam51.952.552.052.552.651.450.550.051.050.850.649.0

Europe

European Union (EU)48.348.447.947.646.647.146.046.247.046.448.149.1

Euro Zone47.547.947.747.646.547.045.745.946.946.347.949.2

Austria50.049.248.347.547.047.945.145.546.046.049.250.2

France49.750.050.651.949.751.150.150.751.750.451.149.8

Germany44.144.444.345.043.243.541.742.144.143.745.348.0

Greece54.756.654.252.454.654.953.653.554.153.954.456.2

Ireland53.952.550.449.848.748.648.750.749.749.551.451.2

Italy47.449.149.748.448.548.747.847.747.646.248.948.7

Netherlands52.552.052.250.750.751.651.650.349.648.349.952.9

Spain50.951.850.147.948.248.847.746.847.547.448.550.4

Czech Republic47.346.646.645.943.144.944.945.043.543.645.246.5

Denmark55.357.848.844.649.549.351.250.853.651.153.149.1

Poland48.749.048.848.447.448.847.845.646.748.047.448.2

Sweden *52.150.552.551.251.251.846.446.546.448.152.053.2

United Kingdom55.153.149.448.048.047.448.349.648.947.550.051.7

Norway **56.253.854.151.848.753.951.855.353.855.051.152.2

Russia52.851.849.848.649.349.146.347.245.647.547.948.2

Switzerland50.749.149.048.645.247.444.948.948.548.847.849.5

Turkey47.246.845.347.946.748.050.049.049.549.551.352.4

Middle East & Africa

Israel52.251.950.452.752.244.350.351.852.851.850.1-

Other Aggregates

Developed Markets49.950.249.248.948.648.748.648.749.649.149.849.5

Emerging Markets51.050.550.449.950.150.451.051.051.151.051.0-

Notes: Data seasonally adjusted

The composite PMI is calculated from the following indexes (weighted as shown): New Order Books (0.3), Output (0.25), Employment (0.2),

Suppliers' Delivery Times (0.15), Stocks of Purchases (0.1), with the Suppliers' Delivery Times Index inverted so that it moves in a comparable direction.

An index reading of 50.0 signals no change since the previous month. Above 50.0 signals an increase (or improvement), below 50.0 a decrease

(or deterioration). The greater the divergence from 50.0, the greater the rate of change signaled.

* Source = Swedbank

** Source = NIMA

Sheet4

03/29/201904/30/201905/31/201906/28/201907/31/201908/30/201909/30/201910/31/201911/29/201912/31/201901/31/202002/28/2020

Manufacutring PMIsMar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Jan-20Feb-20

World50.550.449.849.449.349.549.849.950.350.150.447.2

United States52.452.650.550.650.450.351.151.352.652.451.950.7

Brazil52.851.550.251.049.952.553.452.252.950.251.052.3

Canada50.549.749.149.250.249.151.051.251.450.450.651.8

Mexico49.850.150.049.249.849.049.150.448.047.149.050.0

China50.850.250.249.449.950.451.451.751.851.551.140.3

India52.651.852.752.152.551.451.450.651.252.755.354.5

Japan49.250.249.849.349.449.348.948.448.948.448.847.8

South Korea48.850.248.447.547.349.048.048.449.450.149.848.7

France49.750.050.651.949.751.150.150.751.750.451.149.8

Germany44.144.444.345.043.243.541.742.144.143.745.348.0

Italy47.449.149.748.448.548.747.847.747.646.248.948.7

Spain50.951.850.147.948.248.847.746.847.547.448.550.4

United Kingdom55.153.149.448.048.047.448.349.648.947.550.051.7

Russia52.851.849.848.649.349.146.347.245.647.547.948.2


Valuations Gap Provides CushionWhile European and Asian growth rates may turn negative during 2020, cheaper valuations may provide a buffer for equity investors.

9

5x

7x

9x

11x

13x

15x

17x

19x

21x

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

P/E Ratios (Next 12 Months)

MSCI Emerging Markets (EEM) MSCI EAFE (EFA) S&P 500 (IVV)

Source: Factset



Lowering Our Forecast for RatesWith the off-cycle 0.50% (50 basis points) cut in the Fed Funds rate, we have lowered our forecast for rates in 2020.

10

Source: Factset

1.39% 1.36%

1.01%

0%

1%

2%

3%

4%

5%

Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep-17 Nov-18 Jan-20

10-Year Treasury Note Yield



Asset Class Performance During the Sell-Off

11

Data as of 3.3.2020Source: Factset

Diversification worked.

0.27%

2.00%

4.22%

-0.50%

2.36%

-6.74%

-9.61%-9.02%

-7.67%

-3.66%

4.24%

0.04%0.64%

1.73%

-2.79%

-1.65%

-12.70% -12.58%

-10.23%

-8.85%

-11.02%

1.54%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Cash Tax Exempt InvestmentCredit

High Yield EmergingMarket Debt

U.S. Large Cap U.S. Small &Mid Cap

InternationalEquities

EmergingMarket Equities

REITs TIPs

Asset Class Performance

YTD Sell Off (2/19 to 2/20)



What are Stock Market Conditions Telling Us?

12

Things to watch

• Equity mutual fund and ETF flows

• Investor sentiment

• Volatility indices

• Technical factors: Short-Term Trading Index (TRIN), Relative Strength Index (RSI), put-call ratios

• Margin debt levels



No Euphoria Preceding the Downturn

13

Conditions were not euphoric prior to this downturn.

Source: Yardeni Research, Morningstar Direct



The Market MultipleLower rates should act as a tailwind for market multiples if growth concerns dissipate.

14

Source: Factset

18.7x

14.0x

19.0x

16.9x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

S&P 500 Forward P/E Ratio



All Eyes on CreditHigh-yield spreads have widened, but there are few signs of distress outside of the energy sector.

15

Source: Factset

0

100

200

300

400

500

600

700

800

900

1,000

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

U.S. High-Yield Credit Spreads

ICE BofA U.S. High Yield - Spread - Option Adj Spread Average



Focus on Asset Allocation for the Long TermRisk and concerns have and will always exist.

16

Source: Factset

10

100

1,000

10,000

100,000

1,000,000

Log

Sca

le

U.S. Large Cap Stocks Cash

Soviet Union invades Afghanistan

President Nixon resigns

Start of Yom Kippur War

President Nixon suspends gold convertibility

Martin Luther King assassinated

President Kennedy assassinated

Cuban Missile Crisis

Bay of Pigs

Suez Canal Crisis

Start of the Korean War

Germanyinvades Poland

Hitler becomes Chancellor of Germany

Atomic bombing of Hiroshima

Collapse of Continental Illinois National Bank

Tequila Crisis

Collapse of the Soviet Union

Iraq invades Kuwait

Fall of the Berlin Wall

China devalues the yuanS&P

downgrades U.S. credit rating

Lehman Brothers bankruptcy

Start of the Iraq WarAsian

Financial Crisis

LTCM bailout

9/11

Flash Crash

Black Tuesday

President Eisenhower suffers heart attack

Pearl Harbor

Start of Mao's Long March

Bankruptcy of Creditanstalt

D-Day

Black Monday

U.S.-China Tariffs

Coronavirus



Important NotesCerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Illinois, Michigan, New York, Ohio andTexas. Registration of an Investment Adviser does not imply any level of skill or training. This commentary is limited to general information about CerityPartners’ services and its financial market outlook, which may not be suitable for everyone. The information contained herein should not be construed aspersonalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in thiscommentary will come to pass. Investing in the financial markets involves risk, including the risk of loss of the principal amount invested; and may not beappropriate for everyone. Please note that any benchmark performance shown is purely for illustrative purposes and does reflect a measure of the performanceof an actual portfolio. Benchmark(s) are unmanaged, and the figures for the index shown include reinvestment of all dividends and capital gain distributionsand do not reflect any fees or expenses. Investors cannot invest directly in a benchmark.

The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy anysecurity. All information is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us orrefer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees andservices, send for our disclosure statement as set forth on Form ADV Part 2A using the contact information herein. Please read the disclosure statementcarefully before you invest or send money.

©2020 Cerity Partners LLC, an SEC-registered investment adviser. All Rights Reserved. (03/20)

17


Economic & Market OutlookKey PointsThe Current Correction – Been There BeforeGlobal Growth Estimates Coming DownNo U.S. Recession in 2020Housing Market ReboundFlat Earnings for 2020Economic Data Has Yet to Reflect the Coming SlowdownValuations Gap Provides CushionLowering Our Forecast for RatesAsset Class Performance During the Sell-OffWhat are Stock Market Conditions Telling Us?No Euphoria Preceding the DownturnThe Market MultipleAll Eyes on CreditFocus on Asset Allocation for the Long TermImportant Notes

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