I'm Still Standing: The Bull Recovers in 2021
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I’m Still Standing:
The Bull Recovers in 2021
Presented by
Steven A. Chiavarone, CFA
Vice President, Portfolio Manager
February 2021
Federated Advisory Services Company
21-30085 (2/21) 1
The Big Story is the Economic Rebound
The V-Shaped Recovery On Pace to Transition to Economic Expansion in 2H21
U.S. Real GDP
Billion ($)
19,000
18,584 (9/30/20)
18,000
17,000
16,000
15,000
14,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Actual Federated
Hermes Forecast
Source: Bloomberg & Federated Hermes. As of February 1, 2021. 2
Which Has Been Dramatic and Broad Based
Multiple factors
Thousands Millions
-80%
-28%
-32%
-38% -3% -5%
Continuing claims are down 80% from peak, the fastest 33-week % decline in history by a factor of two. Housing activity is at 14-year high, hitting levels not seen since before the Great Recession.
Index Billions ($)
Manufacturing activity is at the highest level since 2018. Retail sales have recovered and are higher on a year-over-year basis despite the pandemic.
Source: Bloomberg. Data as of February 3, 2021.
3
Savings Rate & Disposable Income
A Stimulus-Supported Surge in Income Has Consumers Flush with Savings
Orlando’s Outlook: Coronavirus Curveball
Source: Bloomberg. Data as of February 3, 2021.
4
Bankruptcies Are Well Below 2009 Levels and Falling
Government and Central Bank Actions Have Helped to Limit Bankruptcies
Source: Bloomberg. 0ata as of February 3, 2021.
5
A Double Dip Recession is Not in the Cards
The Recovery Continues with Several Indicators Hitting New Cycle-Best Levels
Federated Hermes Recession Dashboard
As of February 2021. Past performance is no guarantee of future results.
6
The COVID-19 Vaccines Are Likely to Be Stimulative
A look into vaccine options and effectiveness
Virus Vaccine effectiveness % # of recommended doses
1
2
2
2
2
2
3-4
*2009-2019 Average
Source: Business Insider “Moderna and Pfizer's coronavirus vaccines are more than 90% effective”
7
Record COVID-19 Levels vs. the Start of Vaccinations
Vaccination is happening, but it must go faster to counter record cases, hospitalizations & deaths
Nationwide COVID-19 metrics since April 1, 2020. Daily new COVID-19 vaccination doses administered
7-day average lines per 100 people
Source: The COVID Tracking Project at The Atlantic as of February 5, 2021 (left). Federated Hermes and Github Covid-19 data as of February 5, 2021 (right)
8
The US is Among the Leaders in Distribution
With Over 20 million doses administered, the has one of the highest population-adjusted vaccination rates
United States Percentage of Population to Have Been Administered
Total Vaccine Doses Administered Vaccinations
Source: Github Covid-19 data as of February 5, 2021 (left). Bloomberg as of January 31, 2021 (right).
9
The Recovery Has Benefitted from Massive Fiscal Stimulus
Fiscal stimulus in the US has, thus far, reached 30% of GDP
COVID-19 Fiscal Responses in 2020 & 2021 (% of GDP)
Supranational Loans**
30
Central/supranational bank actions
with fiscal support
Loans & loan guarantees
20
Tax & pension deferrals
Automatic stabilizers in 2020
& 2021*
Conditional business
grants/loans
10
Tax cuts
Transfers, grants, and tax
credits
0
UK Japan Euro Area US
Supranational Transfers**
10
* Based on Fatas & Mihov (2016) post-1990 country-level estimates, calibrated to IMF-forecast shock to growth in 2020/21.
** Estimates of NGEU grants and loans for 2021, assumed to be 35% of total.
Source: IMF, Yale, CBO, OBR, Bruegel, Bloomberg, BMF, Evercore as of 1/26/2021More Fiscal Stimulus is Likely Forthcoming
President Biden’s $1.9 billion plan forms the basis for negotiations
Individuals ($1.2T) Covid-19 ($160B)
Another round of stimulus payments National Vaccination plan
Enhanced unemployment benefits Funding for testing
Rental assistance and eviction/foreclosure moratorium ($35B) Education ($170B)
Childcare investments and Child Tax Credit Funding for reopening schools
Hazard pay State and local government ($370B)
Student loan assistance Emergency funding for front-line workers
Raise minimum wage Aid to public transit agencies
Businesses ($40B) Cybersecurity ($10B)
New grant program for small business owners Funding to modernize information technology systems at
federal agencies
Payroll Protection Program extension
Employee retention tax credit
Source: Washingtonpost.com as of January 14, 2021. CNBC.com as of January 14, 2021. Cornerstone Macro as of January 15, 2021 11Monetary Policy is Also Quite Accommodative
The Thinking About Index
“We’re not even thinking about thinking about raising rates”
– Jerome Powell, June 10, 2020
“We’re not even thinking about thinking about thinking about raising rates”
– Jerome Powell, July 29, 2020
New Fed Chair in February 2022. Will Biden
reappoint Powell?
• Lael Brainard
• Roger Ferguson
Possible third new Fed mandate: price stability, full
employment, and racial diversity
12As Growth Expectations Improve, Rates are Recovering
Economic Recovery and Supply/Demand Imbalances Could Spark Inflation/Rates Fears
Source: Bloomberg. Data as of February 3, 2021.
13The Fed is Likely to Remain Patient
With the Dual Mandate in Mind, Tapering or Rate Hikes Seem Unlikely
It is likely that the Fed will leave short-term interest rates The Dual Mandate, updated
unchanged for some time. (September FOMC statement)
Minutes from the September FOMC meeting revealed that the “The Committee seeks to achieve maximum employment and inflation at
Committee was somewhat divided over the inclusion of forward the rate of 2 percent over the longer run. With inflation running persistently
guidance in relation to average inflation targeting in the statement. below this longer-run goal, the Committee will aim to achieve inflation
moderately above 2 percent for some time so that inflation averages 2
They revealed a belief that additional fiscal stimulus is needed to percent over time and longer-term inflation expectations remain well
anchored at 2 percent. The Committee expects to maintain an
prevent more long-term economic impacts. accommodative stance of monetary policy until these outcomes are
achieved.“
% Inflation – on the rise millions Employment – some distance to go %
2.0 155 16
1.8 150 14
1.6
145 12
1.4
1.2 140 10
1.0 135 8
0.8
130 6
0.6
0.4 125 4
0.2 120 2
0.0 115 0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
Personal Consumption Expenditures (PCE) Core Price Index, year over year SA
Unemployment Rate (%) Total Nonfarm Payrolls (millions)
As of 9/30/20
Source: Bloomberg
1440%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
1/1/1988
1/1/1990
1/1/1992
1/1/1994
1/1/1996
1/1/1998
Source: Bloomberg data as of August 10, 2020.
1/1/2000
1/1/2002
1/1/2004
1/1/2006
1/1/2008
1/1/2010
1/1/2012
Federal Debt to GDP
1/1/2014
1/1/2016
1/1/2018
1/1/2020
1/1/2022
1/1/2024
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1/1/1988
1/1/1990
1/1/1992
The Federal Debt Is A Popular Concern
1/1/1994
1/1/1996
1/1/1998
1/1/2000
1/1/2002
1/1/2004
1/1/2006
1/1/2008
1/1/2010
1/1/2012
1/1/2014
1/1/2016
Interest Expense as % of GDP
1/1/2018
1/1/2020
1/1/2022
1/1/2024
While Debt Levels Have Risen Sharply, Low Rates Mean that the Interest Burden Has Fallen Dramatically
15But Isn’t The Market Dangerously Expensive?
Valuations Are Certainly Above Long-Term Averages
Source: Strategas most current data as of July 10, 2020. Past performance is no guarantee of future results.
16Not So Fast…
Current P/E’s Make Sense in the Context of Lower Inflation and Interest Rates
When yields are
below average,
rising rates tend
to drive valuations
higher
Equilibrium:
5% Treasury Yield
equals 20 P/E
Note: S&P 500 data going back to 1950. NTM/ P/E data since 1964.
Source: Strategas Research Partners as of December 21, 2018. Federal Reserve, Standard & Poor’s, Thomson Financial, FactSet, Haver Analytics, Credit Suisse as of December 2, 2019.
Past performance is no guarantee of future results.
17A Deeper Look Suggests Multiples Are Attractive
The Relationship Between P/E’s and Corporate Bond Yields Suggest Meaningful Upside
Stocks Expensive vs. Bond Yields
Stocks Cheap vs. Bond Yields
*Justified P/E = 1/(Corp Bond Yield + 1.40%)
Source: Bloomberg. Data as of February 3, 2021.
18The Great Rotation
We Are Overweight Value Cyclicals, Dividend Payers, Small Caps & International Equities
Rolling 1 Year Return Rolling 1 Year Return
Russell 1000 Value (RLV) Minus Russell 1000 Growth (RLG) Russell 2000 (Small Cap) (RTY) Minus Russell 1000 (Large Cap) (RIY)
Rolling 1 Year Return
Index Price Earnings (P/E)
All Country World Index ex US Minus MSCI USA
NOTE: P/E adjusted to include only positive earnings.
Source: MSCI, Russell, Bloomberg and Federated Hermes. Data as of January 25, 2021. 19
.The Rotation Started in September
Despite a January Pause, We Expect These Sectors to Gain Steam in 2021
Relative Index Returns
Since 9/2/2020
Source: Bloomberg. As of February 4, 2021. Past performance is no guarantee of future results. For illustrative purposes only and not representative of any specific investment.
20We Are Coming Off of Historic Value Underperformance
With Incremental News Flow Likely to Favor Cyclicals, We Expect Value to Make Up Some Lost Ground
5 Periods of Most Significant 12 Month Value Underperformance
Note: Represents the “troughs” of the Russell Value underperformance vs. Growth on a 12M rolling return basis
Source: Russell; Bloomberg. As of February 2020. Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.
21Cyclical Stocks Are Set for An Historic Earnings Rebound
YoY S&P Cyclical Sector Market Cap Weighed EPS Growth – 3 Previous Recessions and post COVID est.
Market-Cap Weighted EPS Growth (%) of Cyclical Sectors
1 Year Post Earnings Recession Bottom
Note: Includes Energy, Materials, Industrials, and Consumer Discretionary
Source: Credit Suisse and S&P. As of February 1, 2021, Past performance is no guarantee of future results.
22Small Caps Have Outperformed After a Recession Market Bottoms
The Russell 2000 has outperformed the S&P 500 by 22% on average.
Relative Performance of Russell 2000 vs. S&P 500
1 Year Post Recession Market Bottom
Source: Bloomberg. As of February 4, 2021.
Past performance is no guarantee of future results. For illustrative purposes only and not representative of any specific investment. Small company stocks may be less liquid and subject to greater price volatility than large company stocks.
23Dividend Payers Offer Compelling Yield & Valuation
Relative Yield vs. 10 Year Treasuries & P/E Discount vs. Broad Equity Market At Historic Levels
Dividend Yield Compelling vs. Treasuries Dividend Stocks Expensive vs. Broad Market
Dividend Yield Unattractive vs. Treasuries Dividend Stocks Cheap vs. Broad Market
Source: Bloomberg. As of February 4, 2021. Past performance is no guarantee of future results. There are no guarantees that dividend paying stocks will continue to pay dividends. In addition, dividend paying stocks may not experience
the same capital appreciation potential as non-dividend paying stocks
24International vs. Domestic = Value vs. Growth
International Equity Indices Are Much More Heavily Weighted in Value Sectors
S&P 500 Weight
Info. Tech 28.0%
Media &
9.2%
Entertainment
Internet Retail 5.0%
Biotech 1.9%
Total 44.0%
MSCI World ex
Weight
USA
Financials 18.1%
Industrials 15.0%
Pharma 7.5%
Energy 4.0%
Total 44.6%
Source: Bloomberg. Data as od February 3, 2021.
International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards
25Federated Hermes Forecast
Views are as of January 28, 2021
2016A 2017A 2018A 2019A 2020E 2021E 2022E
Real GDP 1.70% 2.30% 3.00% 2.20% (3.50)% 5.30% 3.00%
Core PCE 1.80% 1.60% 2.00% 1.60% 1.50% 1.80% 2.00%
Benchmark 10yr
2.50% 2.40% 2.68% 1.92% 1.00% 1.50% 2.00%
Treasury Yield
Fed Funds Rate 0.75% 1.50% 2.50% 1.75% 0.25% 0.25% 0.25%
S&P 500 EPS $119 $133 $163 $167 $150 $180 $200
Target Forward P/E 16.8x 16.4x 15.0x 25.9x 21.1x 22.5x 22.7x
S&P 500 Target Price 2,239 2,674 2,507 3,231 3,800 4,500 5,000
PCE = Personal Consumption Expenditures. 2016, 2017, 2018 and 2019 are actual.
Views are as of the date indicated and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Source: Federated Hermes and the Commerce Department.
26Federated Hermes Investment Focus
Views are as of February 1, 2021
Recommended % Allocation Recommended Sector Allocation
• Equity – 6% Overweight Overweight Neutral Underweight
• Bonds – 7% Underweight • Discretionary • Comm. • REITs
• Alternatives – 1% Overweight • Health Care Services
• Staples
• Cash – Neutral • Industrials • Energy • Utilities
• Fixed Income Duration – 92.5% • Financials • Materials
• Technology
Asset Allocation Matrix
Equities Bonds
Overweight Neutral Underweight Overweight Neutral Underweight
• U.S. Small Cap • U.S. Large Cap • High Yield • MBS • Agencies
Growth
• U.S. Large Cap Value • IG Corporates • Muni’s • CMBS
• • Eurozone
Emerging Markets • TIPS • Treasuries
• Japan
• Emerging
• United Kingdom Markets
• International
Developed
27Longer-Term We Think 2020 Was A Cyclical Bear in a
Secular Bull
Secular Bears: Cyclical Bears (during Secular Bulls):
Source: Bloomberg as of April 2020.
Past performance is no guarantee of future results
28Not All Bear Markets Are Created Equal
Secular Bear Market Cyclical Bear Market
Duration until 10 to 20 years 12 to 18 months
new high
Depth to down Multiple 40% declines Usually 20%, occasionally
move 30%, never 40%+
Typical drivers -Long recession/ -Short recessions
depression -Market accidents
-Stagflation
-Poor policy response
-Financial crisis/ capital
destruction
Source: Federated Hermes. 29We Continue to Believe that the Secular Bull is Intact
We Expect Markets to Surpass Their Old Highs
The History of the Bull and Bear Market
Note: Shaded areas indicate recessions.
Source: Bloomberg, Federated Hermes. As of January 2021. Past performance is no guarantee of future results. For illustrative purposes only and not representative of any specific investment.
30The Digitization Revolution is Changing Traditional Rules of Thumb for
Economic/ Market Forecasters
A Flurry of Innovation is Changing the Nature of Business
and Leading to a More Productive Economy
Source: Federated Hermes.
31The Digital Revolution Is Occurring Alongside the Rise of the Millennials Source: Federated Hermes; Goldman Sachs. As of December 2018. 32
The Five Key Long Term Drivers of This Secular Bull Market
Are Accelerating, Not Weakening. . .
Impact on Driver of Bull Getting
Driver
the Virus
Digital Revolution Accelerated
Biotech Revolution Accelerated
U.S. Manufacturing Renaissance Accelerated
Supportive Policy Backdrop Lengthened
You Can’t Own Everything Deepened, Lengthened
Views as of April 2020.
33The US Manufacturing Renaissance Will See Supply Chains
Come Back Home
”Brand China” Is Wounded The Center of the US is the
Next Great “Emerging Market”
• Higher shipping costs • Abundance of land
• Higher energy costs • So much energy we burn it at the well
• No IP protection • Easy shipping routes to the best end
• Geopolitical risks markets (i.e. East and West coast)
• Lack of Transparency • Ironclad IP protection
• Pandemic Origination • One of the lowest tax rates in the world
• No new diseases from Kentucky
• Amber waves of grain
. 34The Digital Revolution Accelerates
For the First Time Ever, Digital Investments Surpasses Physical Investments
Business Investment By Type
58.00%
56.00%
54.00%
52.00%
50.00%
48.00%
46.00%
44.00%
42.00%
Business Investment: Physical Business Investment: Digital
40.00%
Source: Bureau of Economic Analysis & Federated Hermes as of August 2020.
35Labor Market is Realigning
Continuing Claims Have Fallen by 21 million, While Initial Claims Remain Elevated
Source: Bloomberg. As of February 3, 2021.
36Productivity Rising
As companies realign their capital and labor, this bodes well for productivity growth
Source: Bloomberg. As of February 3, 2021.
37The Democratic Sweep Brings A Risk of Higher Taxes
Higher Corporate Tax Rates Higher Estate Taxes
Raise corporate tax rate from 21% to 28% Increase tax rate from 40% to a graduated rate
Create a minimum 15% book tax rate of 77%, reduce the exemption from $11.58M to
$3.5M, and eliminate the step-up basis on estate
Double the global minimum tax on offshore taxes
profits from 10.5% to 21%
Carried interest treated as ordinary income Double the Federal Minimum Wage from
$7.50 to $15 per Hour
Introduce a financial transactions tax
Higher consumer prices
Higher Individual Tax Rates
Lower profit margins
Restore the top tax rate at 39.6%
Increased unemployment
Tax capital gains (20%) & dividends (22%) at
ordinary rates Expand the Affordable Care Act
Cap deductions at 28%
College Education
Does not fully restore the SALT deduction
Free two-year community college and four-year
Increase Social Security Benefits college for families making less than 125K
Eliminate the income cap on Social Security
taxes (12.4%), currently at $142,800 Absolve $1.6 trillion student-loan debt
10k max per borrower
38This Could Disproportionately Impact Tech
Estimated S&P 500 Earnings Impact Based on Biden’s Proposals
Note: Utilities and Equity Real Estate Investment Trusts (a Real Estate industry) were excluded from the analysis.
Source: US Equity & Quant Strategy, Compustat Global Research as of July 20, 2020.
39Is Manchin the Linchpin?
New Moderate Bi-partisan Senate Coalition:
Joe Manchin III
(D) West Virginia
Krysten Sinema Jon Tester
(D) Arizona (D) Montana
Susan Collins Lisa Murkowski Mitt Romney
(R) Maine (R) Alaska (R) Utah
40New Democratic Presidents Have Produced Strong Equity Market Gains in Their First Year Source: Strategas Research Partners. As of January 20, 2021. Past performance is no guarantee of future results. 41
Historically Control of Congress Matters Most for Stocks
*
Source: Strategas Research Partners as of January 20, 2021. Past performance is no guarantee of future results.
* 2001-2002 excluded from the chart because the 2000 election resulted in a 50/50 Senate.
42
42But Politics Aren’t Everything
Historically, the Business Cycle Matters More For the Direction of Markets
Business Cycles Have Mattered More Than the Party in the Oval Office
Chart shows annual data as of December 31, 2019.
Source: Bloomberg, Morgan Stanley & Co. Research, NBER, Bloomberg, Haver Analytics. The Morgan Stanley Cycle Indicators measure the deviation from historical norms for macro factors including employment, credit conditions,
corporate behavior and the yield curve. The repair phase occurs due to the lag time between when these factors are beginning to improve and when they turn positive. Report as of July 24, 2020.
43The Math Behind Various Approaches Over a Full Market Cycle
Despite the Uncertainty, Averaging In Historically Pays
Source: .Federated Hermes, Inc. and Bloomberg, 2020. As of 2/19/20.
Based on hypothetical investments in S&P 500. Indexes are unmanaged and actual investments cannot be made in an index.
Past performance is no guarantee of future results. For illustrative purposes only and not representative of any specific investment. Please note that the total investment amounts are different for these examples. See details in the
table above.
44And Has Been A Winning Strategy Over Time
Since 1929, Averaging Has Outperformed the Market in Every Decade Except for the 2000’s
If an investment of $100,000 is made on the last day of a decade, what would the returns – cumulative and average annual –
look like for the following decade?
Like in the previous slide, the “buy & hold” approach represents a one-time investment of $100,000 in the S&P 500, and no
additional investments are made. The “monthly dollar cost average” approach represents and investment of $100,000 in the
S&P 500, and an additional $1000 investment is made monthly on the last day of the month.
Source: Federated Hermes, Inc. and Bloomberg, 2020. As of 12/31/19.
Based on hypothetical investment in S&P 500. Indexes are unmanaged and actual investments cannot be made in an index.
Past performance is no guarantee of future results. For illustrative purposes only and not representative of any specific investment. Please note that the total investment amounts are different for these examples.
Dollar-cost-averaging cannot assure a profit or protect against loss in declining markets. Because it involves continuous investment regardless of fluctuating prices, investors must consider their financial ability to continue purchases
during periods of low price levels.
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