Now, without further delay, let’s begin PNC's Perspectives on the Market webinar, “Investing in a Time of Unprecedented Uncertainty, a Conversation with PNC's Investment and Economic Leaders.” It's my pleasure to introduce your moderator for today, and that is Mark McGlone, Chief Investment Officer with PNC Asset Management Group. Mark, you have the floor.

Mark McGlone:

Thanks, Greg, and thanks, everyone, for joining us this afternoon. This is the fifth or sixth installment of our biweekly calls that we started back in March, as the markets came under increasing pressure. And we've had essentially a V-shaped type of equity market over that time period with a pretty steep and dramatic decline from mid-February to the late March lows, and then after unprecedented actions by the Federal Reserve as well as stimulus programs and income maintenance programs from the administration and Congress working together, the market recovered pretty dramatically. And it recovered almost about 25%, 26% from the bottoms, so much so that now we seem to have a big kind of a divide between what we would call the real economy -- i.e., all of that that is the folks that are unemployed currently, the dramatic increase in the unemployment rate which is up towards 15%, and maybe going higher before this is all over. We've had pretty dramatic disruptions in several industries and in particular in anything related to leisure or travel. We've had pretty substantial declines in automobile sales and truck sales over that time, although trucks seem to be gaining a little bit in popularity. And also, in terms of inflation and energy prices, pretty dramatic deflation in terms of energy prices as well as pretty substantial reduction in the inflation rate.

Yet, at the same time, Wall Street and the financial markets have been generally improving, although over the past couple of days, they've hit another patch of weakness such that you had since the beginning of the year, the S&P is down about 12% if we include today's price action. Which, in normal times, that would seem like a pretty moderate correction, not a dramatic bear market, but a correction. Yet, at the same time, we have the unemployment rate well into double digits and probably going higher.

So, just as those of you who may look at The Economist, or read The Economist, can see the cover this past week. There's a picture of Wall Street and Main Street, and on either side a great gorge where there's a big disconnect.

And so what we're going to do today is to try and connect those dots, and we'll first start off with an analysis by Stu Hoffman, our Senior Economic Advisor. And Stu will be covering not only the items in the real economy, but also Federal Reserve policy and administration policy, how that's working together to try and heal the economy.

And then after that, Mark Hoffman, who's head of our Portfolio Management area, will talk about, how do we construct portfolios in times of great uncertainty and in times sort of following a relatively strong bear market, a very swift and strong bear market. And then a quick recovery after that in how we're constructing the portfolios on a go-forward basis.

And then after that, we'll have some time to go through some questions that were pre-submitted earlier in the day.

So with that, why don't I turn it over to Stu to give us an update on the economy and our outlook there? So, Stu, the floor is yours.

Stuart Hoffman:

Alright. Thank you. And it's been a couple weeks since, as Mark said, we had a call. He described the cover of The Economist magazine, with the markets and the economy. Maybe the bridge between them has been what the Federal Reserve has done, and indeed what the Congress has done. Not sure it's a strong steel bridge, but hopefully it's better than those rickety wooden rope bridges that you always see in the Indiana Jones films of past.

So, what's happened, of course, is that the Fed really even in the last couple weeks, keeps expanding the size and scope of its actions to encourage a smooth function of the credit market. And I think a lot has been accomplished there. The Feds announced an alphabet soup of facilities, by Treasuries and mortgage-backs, that's called quantitative easing.

Just yesterday, they started with their purchase of investment-grade corporate bonds and even some so-called fallen angel bonds, who have fallen below investment grade. They've been purchasing commercial paper, money market funds, they've done their overnight term, RPs, asset-backed securities. They've started lending to state and local governments. The mid-size, so-called mid-size lending facility, or called Main Street lending. Powell said just this morning, it should be up and running in a few weeks. And of course, the PPP loan that was authorized by the CARES Act has been fully subscribed.

So as I mentioned, not that much new came out of the Fed FOMC meeting in late April. I mean, he pretty much said everything, we're going to do everything. Bottom line, we're going to do whatever we can, use a full range of tools to support the economy. But just this morning, a virtual interview with the Petersen Institute of International Finance, I think there are three important things he said. One is that the path for the economy forward is, "highly uncertain and subject to downside risk." I think maybe along with some of the comments by Dr. Fauci yesterday to the Senate, maybe that was a needed, realistic reminder of the challenges the economy faces ahead.

The other thing Powell said this morning was to urge Congress to do more fiscal stimulus. Certainly said or hinted that the Fed is not done, and as they said, this Main Street lending facility should be starting up in a few weeks. And who knows what the Fed has up its sleeve. So some of the talk, at least by Speaker Pelosi, of another $3 trillion fiscal plan, could pass the House. Obviously, it's not going to go in the Senate, so begin a series of negotiations. But I think we will see further fiscal stimulus either in the form of more of those paychecks that went out -- that's part of her program, maybe more money for PPP. Probably more money for state and local governments.

The other thing Powell said this morning, was the Fed was unanimous against negative interest rates, so-called NERP, negative interest-rate policy. He said that the toolbox of their near-zero interest rates, QE forward guidance, and all these lending programs that are referred to as 13-3, the Fed might involve yet to come some yield curve control. What do I mean by that? I just mean they buy as much of the 10- and 30-year Treasury bonds -- and by the way, the Treasury announced a record $3 trillion of issuance of new securities this quarter, and at least as of now, close to another trillion in the second half of the year. You might see the Fed stepping up and doing a lot to buy some of those 10- and 30-year T-bonds. And if the Treasury does decide to issue something even longer than that, basically to prevent any upward pressure on the 10- or 30-year rate. 10-year rate is around 66 basis points. 30-year rate is about 135. So the Fed basically putting a cap on those, would be sort of a, we'll call yield curve control, or really just making sure longer-term rates don't go up much.

As we said, the Congress did pass, since we last talked, additional money for PPP as well, and I guess $310 billion. But that looks like that's fully subscribed now. They also put out an extra $60 billion in disaster or emergency fund for the SBA. They put more money up for testing, obviously virus testing, and more for hospitals.

So it's been a lot of activity in the last few weeks, and I think with more to come, that is kind of that bridge, maybe in part between the markets and the economy. The other thing that's happened, is crude oil looks like it's rebounded from what will probably be its lows of around $20 a barrel, or back in the mid-$20s. The OPEC+ Reduction and the US oil reduction, cuts are now accelerating.

And demand is picking up a little bit as we begin to reopen in certain regions, and obviously certain businesses. The national average gasoline price hit a bottom in late April just under $2 a gallon. That's a national average. Obviously, it varies a lot by state, dependent upon gasoline taxes and closeness to refineries. Since then, gasoline is up around $0.10 a gallon in the past two weeks, but as I'll tell you in a minute, obviously the inflation or I should say, deflation metrics that were released, show how much gasoline and other energy prices have fallen.

So, let's kind of looking beyond April, or shall we say, as maybe part of the numbers that have come out since then, we've had -- well, we know the unemployment rate came out, 14.7%, 20 million to 22 million people lost GDP growth or lost GDP growth -- or lost, declined, in the first quarter, was around 5%. Probably yet to revise down. Even the 14.7% unemployment rate, as bad as that is, the BLS kind of said in a little footnote if it made some adjustments, it was probably closer to 20%. And even since that April jobs report, which was data collected in mid-April, we've had several more weeks of unemployment claims. They've averaged over it'd be probably 10 million more people. We'll get one tomorrow morning, probably another 2 million to 2.5 million people, unfortunately, filing for unemployment claims.

So we look at the May unemployment rate that comes out in a couple weeks, that's the one that's probably officially going to be in the upper teens, maybe 20%. And as they say, that probably even understates things, as well.

In terms of, you know, scary things, this wasn't Shark Week, but it was Inflation Week, or maybe Deflation Week, which was pretty scary. The April PPI dropped 0.8%, not a record, but pretty darned close. Prices are barely up from a year ago. As they say, gasoline prices fell by over 20% in April, and still look like they're going to be down. Import and export prices are going to come out tomorrow morning, they're going to be down. The Producer Price Index was down. So this is the week of how weak the economy is, is pulling down prices.

So near-term, we're going to have deflation, meaning declines in prices and probably even on a year-over-year basis, for the total -- not necessarily the so-called core, ex-food, and energy. But I would say we are not worried about a persistent deflation in the economy going forward. We do think as the economy begins to open itself up, and as we'll talk about and finish up in a minute, talking about this U-shaped recovery, we will see a pickup in inflation. But on the other side, I am not concerned about rapid inflation over the next two or three years. One of the questions I get asked, and was in the list of questions, was, is this massive fiscal and monetary stimulus, going to ignite some inflationary fires two or three years down the road. I don't believe so, because a lot of this really isn't so much stimulus as it is just trying to fill that hole, that huge economic hole, created by the virus and the need to social distance.

And just as in 2010, we had a lot of people coming out of the great financial crisis and the Fed's increase on its balance sheet saying inflation is just around the corner. They were wrong then, and I think people talking about any kind of thing. And much of any inflation out the next couple years is wrong again. In fact, I think the Fed will still be hard-pressed to hit its 2% inflation target, which it hasn't hit in the last eight years. And my guess is inflation won't top 2% for the next three or four years as well.

Some of the other data, of course, April data, consumer confidence fell and in the next few days we'll see huge drops in retail sales, consumer spending, housing, industrial production, all of that just pointing to the massive decline in the current quarter.

So let me just end by sketching out what we still call a U-shaped economic recovery. We expect near 35% decline in real GDP this quarter, which means with the 5% decline in the first quarter, call it 20% in the first half of the year, unprecedented. As we say, we think the unemployment rate will be averaging around 20% or a little under. But in the second half of this year, we do have GDP growth of 5% to 10%. That doesn't begin to get you back to where you started. In fact, we don't think GDP even growing more like 5% in 2021 will get you back to where we were in the fourth quarter of last year, before 2022.

We do think the unemployment rate will come back down in the second half of the year, maybe get in the low teens by late this year, and back into single-digit, but high-single-digit territory next year.

So I guess I'll just sum it up by saying, given the massive fiscal and monetary fiscal stimulus, and probably more to come, some hopefully good news on some flattening in the curve, the virus curve. And maybe some evidence of successful treatments, and the hope -- or fingers crossed, hope -- of maybe a vaccine by next winter makes us a little more convinced in our U-shaped -- not an L, but not a W, not a start-false start- and then way back down to the bottom again type of economic recovery.

So I'm going to end there. I'm glad to throw it to my grandson, Mark Hoffman. No, he's actually not young enough to be my grandson. I'm not old enough to be his grandfather. But I just like to think of Mark as my smarter, better-looking, and younger brother from another mother. So Mark, I'll send it over to you.

Mark Hoffman:

Thanks, Stu. So it turns out we're actually not really related, but we have a very unusual connection in that my wife's uncle is Stu's college roommate, despite us having the same name.

Nevertheless, thank you, Stu, and thanks for the handoff there and the kind words. I want to do something a little different from what we've been talking about on a bunch of our calls. As Mark McGlone noted, at the beginning what we're going to talk a little bit about is, how do we invest in a difficult market? And really, the focused thing about the title today, we talked about uncertainty. And I want to start off by sort of highlighting what we mean by uncertainty. It's not just that markets are volatile, that they're going up and down in the short term.

What it's really about is that we're sitting at a moment where the range of outcomes over the next 6, 12, 18, 24 months, is very, very wide. So, Stu did a really good job of highlighting I think what our best guess is going forward, but I think, you know, as we go through how we think about what markets can do, what the economy can do, very small changes in things that happen can have pretty big changes in what the results of the markets are over the next period of time.

And so there's one story that says we go through, you know, the summer, new cases keep coming down, we reopen the economy. Life gets closer to normal, faster than many of us are expecting today. And that, obviously, would be a pretty strong result for markets and the economy. I mean, it'd still be -- you know, the economy would still be down quite a lot from where it was, and certainly where we thought it would be. But markets have responded obviously very positively to that.

On the flip side, there is also the possibility that reopening happens prematurely, case rates go up, and we end up with a second lockdown or second wave. And obviously, markets respond pretty poorly to that. And so the question that we're faced with is, how do we invest? Really having a hard time knowing which outcome is likely, how do we get ourselves through this period to have success over the longer term? And that's really where I want to focus today.

So as a starting point, I'd like to tell a story, just to highlight, make a little bit more certain, this idea of uncertainty. And so the story is, it's the summer, it's a year that ends in the number 8. Over the last six weeks or so, the S&P 500 is down 15%, 20%, and the reason we're reading about it in the newspaper is, there's this financial firm whose name starts with an L, and it's very levered and it has borrowed an awful lot of money from essentially every -- they're intertwined as a result of this, with every major financial institution on Wall Street. And the worry is that this organization is imploding, and if it collapses, it will bring down essentially with it all of the major banks on Wall Street, which will disrupt the financial system and ultimately disrupt the way ordinary companies finance themselves, leading to potentially a recession as bad as, or certainly nothing like we'd seen, since the Great Depression.

Then the government intervenes, some stuff happens. They put out some announcements. People start to feel that maybe the worst is indeed not going to happen. The market rallies over the next couple of weeks, and sort of 7% to 10%, and we're faced with what to do. Now, again, the story I just outlined, the outcomes are -- can be pretty widely different depending on what happens next, which is essentially unpredictable. So most folks sitting on the phone probably heard this story, and thought to themselves, we are ending in 8, it's 2008, the company that -- the financial firm whose name starts with the letter L is Lehman Brothers. And what you know, is that in the Fall, Lehman Brothers did in fact collapse. And so after that short market rally late in the summer of 2008 there was a 35% decline over a 10-week period in the S&P 500. So obviously, that's a moment where you're sitting, and like some are, they don't believe that it'll rally, get out, and you know, wait to see what happens next.

I think a lot of folks are feeling that around now, but here's the cautionary tale. There's another year that ends in 8, where everything I said so far also applies. And that's the summer of 1998. Now, you probably don't think of 1998 as a bad year in the history of the stock market. It was, of course, one of the central years of the dot-com boom. But August 1998 is actually the third worst month for the S&P 500 in the last 40 years. The worst one, not surprisingly, the October 1987. The second one was October 2008. Again, not surprising. But August 1998 was actually the third worst month in the last 40 years. It was actually worse than March 2020.

And it was because there was this hedge fund called Long-Term Capital Management -- so there's the L -- and they had a big, levered bet on a bunch of very obscure securities. And when the Russian government defaulted on its sovereign bond, which was thought to be unthinkable, the firm collapsed.

Now, in that case, a group of regulators got together -- in fact, Time Magazine had a front-page cover called, "The Committee to Save the World." And they came in and they worked it out, and they were able to unwind this hedge fund without the damage that people feared. And so, unlike what ultimately happened in 2008, things got better really, really fast. And in fact, in the Fall of 2008, the stock market was up 28%, and then it was up quite a bit more in 1999, up quite a bit in 2000.

And so the story here is that when you're sitting in that moment, when we don't know what's coming next, taking the option of just saying, okay, I'm going to sit out and wait, what I want to make sure you folks get from this is that it can be really, really costly. And by -- so it's not -- the easy answer is not, "sit it out." It's a tough choice going both ways.

And in fact, we've just lived through this. If you think about what happened over the last couple of months, you know, we had a drop of 13% from February 19 through the end of February. And then we actually had a short rally of 6% for the first few days in March, followed by an almost 30% decline in the middle two weeks of March. Then we had an 18% rally, and then a 6% drop, and then another 18% rally. We are up almost 30% from the bottom on March 23rd.

Now, what's next, we're sitting on here, we're going to do everything we can to try to figure it out. But we have to keep in mind as we think about how to build portfolios, how do we -- the goal here is not to beat the benchmark in whatever world happens to come about. It's how do we maximize the probability that if you're on the board of an institution, you're going to be able to continue to offer the support, that the endowment is going to continue to offer the support to that institution, that the institution needs to keep providing its services. If you're thinking about someone in retirement, are you going to be able to keep living the live you want to live, leave behind for your kids, your grandkids, maybe set up that foundation? Are you going to be able to do the things you want to do?

Maximizing the probability of that success, that's what we're after. And so the key thing to remember here, timing the markets is extremely, extremely difficult. And you have to keep in mind, too, that if you do try to time the markets, if you're a taxable investor and you have to pay taxes on realized capital gains, if you try to sell after the market was down, or for that matter after the market was up and then buy back in later, the amount you're actually going to do and then the tax implications of what you're going to do, really can severely limit the benefits of trying to time a trade even if you get it right.

Here is a very dangerous thing for investors. Both the fear of loss and the fear of missing out. In fact, one of the key memories I have from my days working at a hedge fund in 2007 to 2008 is how many false starts there were, how many times the fear of missing out pushed in the direction of buying back in after some market rally in which you would have only bought, right before the next drawdown.

So just to highlight this again, in 2008, there was the 35% drawdown from August to October in 2008. But then there was a two-week, 18% rally. People thought things were getting better. Then there was a two-week, 25% drop. Then late November into January of 2009 there was a 24% rally, followed by another 28% drop before we finally got the bottom.

We don't think that the next six months hold a massive drawdown, but we do expect there's going to be choppiness at it. And so we've got to think about how do we manage that? How do we manage the fear, both of loss and the fear of missing out, to get to the right answer?

So to do that, I'm going to talk a little bit about the long term. And thanks to Robert Schuler, the Nobel Prize winning economist at Yale, we have data on an equivalent of the S&P 500 going back to the 1870s. So we have 150 years of US stock market returns. And what's amazing about those returns is the stability over the long term. So it's actually really interesting. If you made a chart of this, and you plotted it from -- and you just look at the 1880s and 1890s, and just kind of projected forward, what would the price of the S&P 500 be in say, 2015? You'd get it almost exactly right.

So from 1893 to 1993, think of all the things that change: world wars; the Great Depression; the Roaring '20s; the baby boom; electrification; television; the interstate highway system; airplanes. And over that time, net of inflation, compounded over time, you got about 6.5% a year in US stocks. And the reason why that sounds maybe a bit lower than what you're used to is because I've taken out inflation.

By the way, there's also stagflation. There were interest rate moves, and really extraordinary things happened. What's kind of interesting is that then, from 1993 to 2013, the next 20 years, we had the dot-com boom and bust, 9/11, the real estate boom and bust, the great recession, dramatic changes in technology. Computers, the internet, Amazon, computers went from being a whole room in some office to fitting in your pocket. And over that time, if you didn't pay attention, there were two 50% drops in the stock market in those 20 years. But if you invested in 1993 and didn't bother opening your statements or read the newspaper for 20 years, and just opened up your statement 20 years later in 2013, you'd have 6.5% annualized, net of inflation, over those 20 years in the S&P 500.

It's interesting to note that through yesterday, the [inaudible] the drawdown we've had this year from 2014 through yesterday, we've actually been averaging above that. We've actually been averaging 8% annualized above inflation in equities.

So there's no guarantee -- you know, there's no guarantee of what the future is going to hold. But for 150 years, we came -- fairly large fluctuations, but also a lot of it is called mean reversion. A lot of return to the mean, despite those large fluctuations.

So another thing to contemplate as we think about where we are and where we're going, is that short-term market turbulence has actually been a really poor guide for investors who are thinking longer term. And so, and so the nature of it is, if you think about 10-year returns, and you ask when are good times to invest over the next decade as opposed to over, you know, what it's going to be like over the next 6 to 12 months, it's actually interesting to note that if you invested in December 2007 and waited 10 years, well, the next 15 months were pretty brutal. Over the next 15 months, you know, you went through the great financial crisis. But interestingly, if you did not open your statements for 10 years and you just waited until the end of 2017, you got 6.5% annualized net of inflation on your S&P 500 investments.

It's also interesting to note that the worst time in the last 50 years or so to invest on a 10-year basis is actually the end of 1998. And it's worth remembering that unlike the end of 2007, you're actually in for a couple of years of really strong economic performance and really strong stock market performance before the problems hit.

The stock market performance from 1998 to 2008 was actually negative. Now, part of that's to do with the fact that valuations were extremely high in the late '90s, and then at the end of 2008 during the midst of the crisis, valuations of stocks were extremely low. And so we got that recovery that happened afterwards.

But when you're thinking about what the next 10 years is going to look like, what we think about the next six months is probably not going to be a great guide. And so if you're asked the question, where are stocks today? Marginally expensive, not very expensive, and certainly not as expensive as they've been in the past, especially during periods of low interest rates.

A quick note on interest rates is of course, what are you going to do if you decide you want to sit out the market right now? If you want to wait for calmer times, well, you probably are putting your money in cash, or bonds, or you know, other forms of fixed income. The challenge is, of course, interest rates are incredibly low. And there's a lot of folks who talked about this as being some sort of anomaly. But we actually, thanks to Robert Schuler, we also have interest rates in the United States going back to the 1870s.

And one of the things we see when we look at that data is that today's nominal rates, that is, the interest rates that you get paid on US treasuries before you think about the issue of inflation, are indeed lower than they've been at any point in that 150-year span.

But when you factor in inflation, it's actually not the lowest it’s been. And low rates net of inflation can exist for a very, very long time. In fact, from 1911 to 1982, the real return -- that is, the return net of inflation on an intermediate US Treasury fund, so think owning sort of like, 10-year Treasuries, rolling them, of zero.

That is, you only kept up with inflation, using 10-year Treasury notes, for 70 years. That period of time, from 1981 to 2011, where you had 5%, 6% a year, not even thinking about the peaks when it was like 15% a year, where you get almost equity-like returns out of the fixed income market. So you weren't giving up that much to sit on the sidelines. We don't -- we don't live in that world. The cost, today, of sitting on the sidelines, can be very, very high.

But I think I've just told a story that's a little bit scary. You know, in the long run, yes, we think equity [inaudible] markets will do well. The short run is rather uncertain. But sitting it out can be really scary, and in fact, trying to time it while you try and sit it out, wait until the market's cheaper, but then the market goes up a lot and then you feel, oh, goodness, I better get back in. And then of course, you get back in right before the next fall. That's all really scary. That's all really concerning. What do we do?

And so now is when I talk about the framework that we use, to approach investing in difficult markets. And there's three core pieces to it. The first one is, set clear goals. And then do little things and stick to it.

The first story, setting clear goals, this is the most important part. And this is really the biggest value add that having a good partner as an investment advisor, as a financial advisor, brings. The most important conversation is about your goals, whether its money needed to support the institution that you care about, whether it's about the spending you want to have in retirement, whether it's about the help you want to give to the kids, the grandkids, buying a house in the South of France, because that's what I'd like to do. It's about maybe setting up a foundation to support Alzheimer's research, because that's something that runs in your family. What's the money for? Those are the goals.

Once we know that, once we understand that, we can start to build a portfolio that maximizes the chance of actually meeting those long-term goals and aspirations. And when you have a conversation about what kind of risk do you have to take in the short term to get there, how to balance that volatility risk, the ups and the downs of the market that we're experiencing right now, that are painful, that are hard, that are -- that are really, really -- you know, that hurt.

But if you know that your portfolio is set up with this kind of market at some point, they didn't know when the recession was going to be, exactly. We didn't know -- we certainly didn't know what was going to cause it. But absolutely all -- everyone who has been working with a PNC financial advisor over the last 10 years was, it was incorporated in the plan that this was going to happen at some point.

And so if you have a plan, if you know what your goals are and you have that plan, it really helps you with the other two parts. It helps you sleep at night when markets are tough. And helps you stick to it.

So let's talk about doing little things, and I'm going to talk a little bit more about this in the next couple -- next few minutes. We talked about timing the market being really, really, really hard. And so, trying to get in and out on equities is not going to be successful. In fact, I'll tell you, I used to -- the job I used to have, looking at hedge fund managers, picking hedge fund managers to recommend for investments. And we did a study of hedge fund managers who did things that would take on extra risk when they were, thought the markets were going to do well. And they would reduce their risk profiles when they thought markets were going to do poorly. And we found that none of them were actually any good at it. They're very good at picking stocks, so they made money for their investors, but market timing was not where they were making money. And if they can't do it, I don't expect to do it. And we shouldn’t expect to do it.

But there are things we can do in portfolios that you don't have to necessarily time the market perfectly to still be successful. So a good example of this is, we for a while now recommended to many of our clients publicly traded infrastructures. So, think highways and airports, utilities, in a specific fund that we've used. And that fund has done an extraordinary job for us during periods of market stress over the past couple of years. In fact, it outperformed by over 8 percentage points in the fourth quarter of 2018, but it’s generated equity-like returns over the course of the good years, too. And it outperformed this year as well.

So, there are these little things. They don't do this in -- you know, we're not going to put, you know, 20% of your portfolio in that category, but maybe a few percent. And we do a whole bunch of things, that I'll talk more about in a second after I sort of get to the point about sticking to it.

So the last important piece is, if we set clear goals and build a portfolio that you can have confidence in, even in times of stress, and then you do the little things that help on the margins, the key thing is then sticking to it. The average investor, there are numerous studies of this. The average investor in a mutual fund trails the fund's published performance, and the reason is simple. Most of us buy when a fund had done well, and then sell when it doesn't. And you know what, we do this with the equity market too, and credit markets.

If you stick to it, you don't have to worry about the timing. And actually you can sleep better at night, and you capture the good years. You don't miss out on them. You suffer during the bad years. Then in the long run -- in the long run, it isn't really that long. Even for folks who are nearing retirement, or in retirement, even if you're in your 80s, you're not just think -- if you're nearing retirement or recently into retirement, you've still got to be planning for 20, 30 years. And if you're even in your 80s at this point, you're still kind of planning for 10, 15, 20 years, I hope. But you're also probably thinking about what you're going to leave behind. And so you, too, have a longer-term horizon.

And thinking about how we're going to maximize the probability of hitting those goals based on that conversation with an investment advisor, that's actually the best -- that's how to invest in periods of market stress. That's how to know that you're pretty confident that things are working, that you have the right program in place, and you can survive the moments of difficulty.

So let's talk a few of the other little things, because people clearly are going to want to -- you know, lots of questions about this. And I should note, by the way, just on the prior section, there were lots of questions that came in about people describing their situation, and where they are. And the answer to every one of those questions, if you're thinking about, you know, I'm 65, I'm retiring, I have a 60/40 portfolio, what should I do now? I can't answer that on a big conference call because we've got to know you. We have to know your family, have to know your circumstances. What do you need? What are you thinking about? What are those goals? And so you've got to have that conversation with an investment advisor who understands you, listens to you, and then can figure out how to incorporate that and give you some proposals to see what things make sense.

That said, there are some little things we can talk about. Where are we -- you know, given where we are in the markets, trying to figure out how to balance that upside risk with downside risk. One of the big things we're going to talk -- that we're doing, is staying defensive. So while we may be maintaining our equity exposure overall, we are investing in things, like I mentioned, global listed infrastructure. We actually think REIT exposure makes a lot of sense. Now, you have to be mindful of what you own. REIT, even if you buy ETFs, they are very different from each other. So, know which ETF you're buying. Some of them have exposure to interesting growing sectors of the economy, so for example, things like cell towers and data centers that are going to benefit from a transition to 5G and have less exposure to things like retail and hotels, and some of the other challenged parts of the real estate sector.

So, knowing what you own and owning the right kinds of REIT exposure can actually be very advantageous. Not every week, not every month, not every quarter, but over time we think it can be very helpful and certainly has been helpful. Not as much this year, but certainly it was in 2018, and some of the stress periods in 2019.

And the other thing we're doing on the defensive, is thinking about active equity managers, and a particular focus on active equity managers who have more defensive strategies. Again, it helps on the margins, but keeps you invested to capture the upside. So you might trail a little bit in a month like April, but it helps a lot in a quarter like Q1. Now, it's not the same as of course selling out of your equities, right. You're still going to lose money if the market is down a lot, but it helps all these little things add up and help with the margins.

Some other places where we see opportunity, emerging markets, both in equity and fixed income. The one thing I would note here when we say, that's going to make a lot of people cringe, is keep in mind that when you read stories in the newspaper or you hear economists talk, what they mean by emerging markets is very different from what investors mean by emerging markets. Investors only talk about emerging markets. We're talking about investment in companies that serve very large, modern economies, so you should be thinking, the big cities of China. South Korea is in the EM index. You should be thinking about Eastern Europe, so places like Poland, or the bigger countries in South America, Brazil, Chile, or India.

Yes, many of these countries do have areas of extreme poverty. But they also have very large, growing middle classes that are served by the companies that we'd be investing in. And so when you think about, when you're imaging, gosh, how is the emerging world going to deal with things like COVID-19, keep in mind that we're really -- when we're talking about investing, we're talking about countries that have modern healthcare infrastructures, that have modern financial systems. We're not talking about investing in the distant frontiers.

And these countries, actually, they've got more interest rate space to cut rates. They have growing economies that as they reopen there's huge growth opportunities, and there are real green shoots. And in some cases, especially in Asia, they're further along in terms of the COVID crisis than we are. And so we think the opportunities out there actually look fairly compelling. Again, don't put all your money there. It's something you can do around the edges, that we think can be additive over the next couple of years.

If there's another stress period, something to really think carefully about is what we call selling volatility. Sometimes that can be done for certain types of [inaudible] institutions that might be done directly by selling puts. In other cases, it might be through something called structured notes. If you Google structured notes, you will see bad stories. Don't worry, we don't do those kinds of things. Talk to your financial advisor and walk through how we protect you.

The reason why selling volatility, selling puts, or buying these certain types of structured notes is really advantageous when the market is stressed, is because actually, people will pay you an awful lot for market insurance when the market is already down a lot. That means you get paid a premium for providing insurance to somebody else when risk is actually lower for you. So as an example, if you wanted to sell volatility, if you wanted to sell options or you know, use these structured notes on March 23rd, you are effectively providing insurance to people with the market -- if the S&P 500 fell below 2000, or 1900, or 1800. The market is at 2800 today. Selling insurance today is really -- is dangerous. Selling insurance when the market was -- that was there, actually far more favorable. And that you got paid more than to do it.

So, having that in your mind, having that conversation now, to be prepared if we do have another drawdown, that's an opportunity.

In fixed income, I think our core focus today is actually shifting towards active management with flexible mandates. The idea there is, there's a lot of corners of the fixed income markets that have not yet recovered. And so we want to have managers with the flexibility to go find those opportunities, to generate some excess returns, while taking on a reasonable amount of risk.

If you're a taxable investor, think about tax-less harvesting. Have a conversation about tax-less harvesting. What tax-less harvesting is, is selling some of the things that are down, realizing those capital losses that you can use to offset capital gains in other parts of your portfolio to get yourself positioned in the right way.

We're still somewhat wary of energy, so just because something's cheap doesn't mean you should go buy it. The energy story is, we think is more secular. Demand for oil and gas is going down, not just because of the COVID-19 lockdowns, but we think just more broadly. The Saudi-Russo oil price war that's started in March, we think, is not just simply going to lift. Net oil prices are going to -- could stay low for a long time, so be wary of energy in portfolios. And by the way, we have been looking and scrubbing energy exposures as best we can out of our portfolios.

And another one that comes up a lot, that I want to say, avoid, is things like gold or Bitcoin. I mean, the reasons for that is, over time, these are terrible investments. So, gold today is priced, despite the recent rally, is actually below the peak in 2011. Gold is not an investment. It's a trading entity. It's a trading asset. And predominantly if you're trying to trade it, well, you've got to time it right. And timing is hard. And by the way, you're up against hedge fund folks.

Back in my hedge fund days, actually, my favorite trade was that we shorted gold the day before the peak in 2011. And so we don't recommend clients try to do that here. Gold has been around a long time, but it doesn't pay an income stream. And it's had a worse result than almost anything else we could own when you look over any kind of time frame longer than a few years.

And so, I'll give that -- leave that as a little bit of a rant on that one. But that was a question that came up a lot, and so I'd say that is a big reason why we don't recommend it.

The last thing I wanted to talk about, is about deploying capital. Because this is another question that came up a lot in submissions, right. I've got cash sitting on the sidelines, or as cash has come in, I'm trying to think about, should I be investing? And so, this is a toughie. The historical data really, if you are hyper-rational, the historical data suggests that it's actually rare that you can buy stocks at a material discount to today's price. So yes, the market fluctuates, you know, a few percentage points on a regular basis. But actually, while 10% or more drawdowns do happen, stocks go up most of the time. And the price is actually not frequently 10% below today's price.

So that's the interesting thing. If you started this process, you asked this question, anytime between January 2016 to October of 2017, despite the drawdown in March, you would have -- despite the drawdown in March, you still would be waiting to find equity markets less than 10% down today. So you actually haven't had the opportunity to buy it at 10% drawdown. If you waited, if you didn't buy on March 23rd and you waited until April 23rd, the only times where you've actually had a chance to buy stocks at a 10% discount below sort of the current prices was late in Q4 of 2019, into January and February of 2020. It's a really unusual opportunity to buy stocks substantially cheaper.

But we're human. And human beings get typically more upset by a loss than missing out on a gain. And so, invest in cash that results in a quick loss often is far more painful for us than missing out on part of an up market. So what we recommend doing is setting a plan for deploying capital over time, so that by the end of each month or the end of each quarter, there's a set amount that just has to go in no matter what. And then you allow for opportunistic buys if there's a good drawdown in the way. And so that's something, again, to talk to your financial advisor to figure out what the right plan is.

With that, I'm going to conclude with one last thought and then we'll get to Q&A. And the story here, the thing I want to leave you with is, over the past 150 years the world has been through multiple global wars, financial follies, and crises, and indeed, pandemics. So, there was three flu pandemics in the last 100-plus years before this one. Yet, over that time, economies have grown. The standard of living has gone up. Companies have innovated and profited, and equity investors have been rewarded for their investments.

While this year may be very different from what we expected, when we really think about it, the details would be different but the world 3 years from now, 5 years from now, 10 years from now, and beyond that, actually doesn't look that much different now than it did a few months ago. And so, we're going to get through it. And the past does tell us that the next 6 months, next 12 months, it's hard to really know. But if we take the plan, if we define clear goals, do little things on the edges, and then stick to our plans, we can get there successfully.

So with that, I think I'll turn it back over to Mark. We've got some questions. And thanks for listening.

Mark McGlone:

Mark, thanks so much. We do have a few questions. I'm going to start off with one or two, to Stu, and then I'll turn some over to you, Mark.

First question deals with interest rates. Stu, if Treasury rates get close to zero, and we had short-term interest rates actually go below zero for a brief time period back in the height of the crisis -- but here we are a few months or so past that, a month and a half passed that. If interest rates get close to zero, or even fall below zero market rates, would the Fed actually work to try and push interest rates higher, and thus avoid sort of a negative interest rate trap that you had been talking about before?

Stuart Hoffman:

I think it's unlikely that say, market rates, let's say Treasury rates from 2 years out to 10, would get below zero like they are in Japan and Germany, unless the Fed actively, you know, supported that by lowering their Fed funds rate target in the negative territory. Now certainly, with the ECB, Bank of Japan, Bank of Sweden, the way rates got negative in many of those economies was the central bank encouraged that by, or even precipitated that, by making its target rate negative. Meaning, you know, banks would actually I guess, that held Fed funds, would have to pay the Fed as banks in other countries have to do. That was sort of the bedrock that pushed short-term or even medium-term Treasury, meaning sovereign debt, into negative rates.

So if the Fed -- and as I say, Powell, today, was pretty clear that the FOMC and he even emphasized all FOMC members, are against negative interest rates, meaning setting the Fed funds rate target -- which is now zero to 25 basis points -- setting it negative, making it minus 25 basis points, or pick a number. Without that happening, I think it's very unlikely that Treasury rates would fall below zero. If they did, you'd have a quote-inverted yield curve, and I guess the most unusual kind of all. Not only would long rates be below short rates, but they'd be below zero. We've never seen that before.

So in that sense, I think the Fed not lowering its Fed funds rate target below zero is sort of preventative medicine, so that market rates -- meaning Treasury rates -- beyond a couple of years would not fall in the negative territory. So if that happens somehow, I suppose the Fed might try to raise Treasury rates. But it's unlikely to happen unless the Fed needs that parade in the negative territory. I'm not sure that's a parade as much as a funeral march.

Mark McGlone:

Or a dirge. Another question, actually, has to deal with the stimulus checks that were received. Many individuals received stimulus checks, and those with children also received additional payments related to their children. One of the things that's kind of confusing for many people is -- were those checks some sort of prepayment for refunds that may be available after the 2020's taxes? So these are the taxes that would be filed in the first quarter of 2021, for 2020's taxes. Is there any relationship between the stimulus checks and those taxes?

Stuart Hoffman:

No, there's not. As we know, the tax deadline for this year, filing for 2019, was pushed back to July. But those checks that went out -- and by the way, the Fed -- the Treasury calls them refunds or rebates. I was looking at the numbers here. 150 -- there's $300 billion in total, about $150 billion went out right in the middle of April. For the whole month of April and now for the first 11 days of May, it looks like about $185 billion of the $300 billion have either been direct-deposited or now actually received in the mail. So, there's more to come.

What's confusing is if somebody did file a 2019 tax return in the first three or four months of this year, and was due a refund on last year's taxes, they would get that refund. But that's different from those tax checks. They're refunds. $300 billion, as you said, $1,200 individual, $500 per child, for incomes below a certain level. Those are not prepaid on next year. Those are a -- I wouldn't call it a gift. Those are an intended payment to lower-income individuals to help them deal with the tremendous loss of income and jobs we've certainly seen since the CARES Act was passed. And particularly disproportionately for lower-income individuals, often in restaurants and other service businesses. So, no. Those have nothing to do with prepayments of you know, tax refunds of 2021 for the 2020 taxable year.

Mark McGlone:

Thanks. Next question is going to go to Mark Hoffman, and this has to deal with dividend-paying strategies. So obviously, we've seen companies in various sectors either cut their dividends or suspend their dividends, and I'm thinking, you know, particularly in the retail sector, in the travel leisure sectors, entertainment sectors, and even in the automobile sector we've had some dividends either cut or suspended. How should we view dividend-paying equity strategies in this environment? And particularly with reference to just the fact that interest rates in general are low, whether it's money market rates, investment-grade taxable bonds, and even municipal securities. So, we have low interest rates, and we have dividend-paying strategies. How should we view that in this very unsettled time?

Mark Hoffman:

So I'd say generally speaking, our view is to take what we call a total return approach. That is, don't judge a stock based on the dividend that it pays, per se. Think about what you think the total return opportunity is. Because you can always sell some of the stock. So if you think about some of the best-performing companies, some of the companies that are in the best industries, the best opportunity sets, are large companies that are reinvesting in themselves rather than paying dividends out to shareholders. And you want to own those. But if you own, say, a company like an Amazon, that's maybe not -- you know, is not generating a whole lot of income for you, but you can always sell a few shares every year because it's going up a lot. If there's value being created within the company, the share price will go up faster than the share price does for a dividend-paying stock.

So you want to compare companies on an all-in basis. The challenge with focusing on dividend-paying stocks, for those who -- you know, if you're saying, hey, I still care about -- you know, I want that dividend check coming. And there are some reasons about, from a corporate governance perspective and so on, that dividend-paying stocks have some advantages. But when you focus on dividend-paying stocks, you also necessarily end up focusing on certain -- you know, you end up overweighting certain segments of certain industry, certain segments of the market, that can cause your performance to vary pretty dramatically. And then the final thing you have to be really careful about, as Mark mentioned, is sometimes high dividend yields are for a reason. That is, the likelihood that those dividends are going to continue at that rate isn't very good. And so you have to be mindful of that.

So overall, if you're looking to generate income, the way we tend to build our portfolios is we try to own a broadly diversified equity portfolio, broadly. One that's going to capture -- it has the highest likelihood of capturing everything that's going on in the economy, taking advantage of the full opportunity set. And then just selling some down on an annual basis to generate the cash that you need, rather than saying, let's focus on the companies that are delivering the cash to us. Because we think that's a safer play. And in the current environment, you look at what's actually doing best. You know, the kinds of companies that are capitalizing -- that's not a fair word. But the companies that are benefiting as a result of COVID-19 often are sitting in tech, and those tend to be the companies -- those tend to be companies that aren't paying as much in dividends as opposed to places like the financial sector, certain types of REITs, and industrials, and energy companies that are more impacted negatively by the economic environment.

And so, you have to be mindful that the fact that dividend-paying strategies tend to be a bit more concentrated in certain places and missing out on what are potential opportunities elsewhere. And so, going back to the uncertainty theme, I'd rather be more broadly diversified, sell off a few shares each quarter or each year, and to generate the cash we need and get -- you know, because we think that's going to generate a better long-term return story for folks to do it.

Mark McGlone:

Thanks, Mark. The last question, I'm just going to try and wrap it up, deals with, what's sort of the outlook in the post-COVID world, what industries, what sectors seem to be favored or maybe not-so-favored in the go-forward economy? And we've sort of talked about this in our previous sessions, our previous webinars. I would just emphasize, you know, what's happened here in the past, we'll call it month-and-a-half, two months, is obviously the incredible stoppage of the US economy and really the world economy in a very dramatic fashion that's caused dislocations in many industries, and in many sectors of the economy.

What it's also done has started to accelerate trends that may have already been in place. So, think of it from the standpoint of within the retail sector, there was less and less emphasis, or less and less traffic, in traditional stores, traditional retail stores, whether it's big-box department stores or even specialty stores. And more and more transactions occurring online and digitally. And we've seen that, you know, expand pretty dramatically.

The idea that more and more individuals would be shopping online for groceries has certainly accelerated during this time period, even -- especially in a period where you might not even be able to get a delivery time slot. So you know, companies that are servicing that part of the economic model are expanding capacity. They're expanding employment and they're gaining market share.

In terms of interest rates, you know, as Stu has discussed, interest rates are low. They're more than likely going to stay low for a considerable amount of time. And so you know, in working with Mark's comments there, income-producing assets are always interesting, or more than likely more income is going to be generated from certain portions of the equity portfolio. You have to look at it, though, from the standpoint of the total return of the portfolio is what eventually drives the capability of meeting goals and targets, not just the dividends that may come off of a portfolio.

And then the other point in terms of long-term perspective, just the modes and ways we interact in business settings will be changing from the standpoint of just an incredible amount of videoconferencing and video interactions, and conference calls such as these, rather than face-to-face meetings. So that's going to have an effect on business travel, on the volume of travel, for business-related items. You'll see those companies that are helping and helping to foster the expansion of that capability of conducting business digitally, and through video and virtual interactions as opposed to in-person interactions, you'll see those sectors of the economy also do well.

So with that, why don't we stop here? And I say thank you to all who participated today. Thank you very much to Stu and Mark for their insights and their comments, and I thank all of our participants today. I hope your questions were answered, and if not, please reach out to your advisor and we can continue the conversation.


Great. Thanks, Mark. And that does conclude today's webinar. Thank you so much for joining us, and you may now disconnect. Have a good day, everyone.