Hello, and welcome to today's webinar on market volatility. Our speakers today are Mike Rivitch and Mark Sullivan from Merrill Lynch and Paul Pezza from PIMCO. Before I turn it over to them, I'd like to let those of you who are live with us know that you may submit questions during the webinar via the chat box in the lower left side of your screen. Also, a PDF copy of today's slides can be found in the handouts tab of the webinar home page. This webinar will also be recorded so that you may watch or re-watch on demand at your convenience. With that, I will turn it over to Mike. Great. Thank you, Liz, and good morning, everybody. I appreciate the opportunity and the time to just kind of talk about what's going on in the markets and the historic times we're in here with the volatility that we're having. As I mentioned, as you can see on the screen, the environment that we have right now that has unfolded is generational and historic. What we're going to do today is just kind of go through some data on COVID-19, the outbreak globally, just how we got to where we're at, which I think everybody understands, the potential economic effects that could come out of this, the latest policy response from the government and the central banks, kind of investor sentiment in the last ages. What should you be doing regarding your portfolio, your investments? A couple things to note on this is things are moving rapidly, and this data that we have in the presentation is as of late last week, which typically would not be that bad only going in three or four days later to come out, but due to some of the rapid changes we've been seeing, some updates, and we will give you some updates just on some certain things that have changed since last week. Then also, Mark Sullivan from our Chief Investment Officer, Portfolio Solutions Group, is on the line with us. He's going to give you kind of some timely updates as of yesterday and today, what we think on the market economy, and as was mentioned, we have Paul Puzza from PIMCO on. For those that are not familiar, PIMCO is one of the largest fixed income or bond managers in the world, and so we thought it would be great to have Paul on to give us a few updates on the fixed income and the credit markets, as well as just kind of a macro economic view from their standpoint. Just so you hear, two different standpoints, where Merrill Lynch stands, where PIMCO stands, and the reason we thought it was pertinent to have PIMCO on is that we are seeing historic movements in the bond market, and so we thought that would be timely, and all of you would like to kind of hear a few comments from Paul. We'll go ahead and begin. As I mentioned, you saw historic dislocations in the financial markets, the 11-year bull market that we were in came to an end, and it's the fastest move to a bear market industry. You'll see from one of the other sides, it's one of the fastest and most rapid downturns we've ever had in the stock market's history. We also saw bond yields fall to their lowest levels on record. Again, a couple of weeks ago, you had the 10-year, I think, close to half a percent, and the 30-year, well under 2 percent, so historic. Lows, there's really been, as you'll see, I'll touch on in a few minutes, not a lot of safe places to hide. Even through yesterday, the traditional just bonding index is up 1 percent. I joke, what has done well? Volatility. Through yesterday, the VIX, which is the volatility index, is up close to 350 percent year-to-date. What caused this market volatility? I think everybody's aware of the COVID, the fears from the COVID-19 and the concern of economic contraction. One of the things we'll talk about is that we are in a recession. Bank of America came out a couple days ago and said that we are in a recession. How long is that recession going to last? The second thing is the collapse in oil prices. A lot of people think everything in this market downturn has to do with COVID-19. It's really not. It's a two-catalyst approach, or two-catalyst downturn. First catalyst being COVID-19, and then the second catalyst being the sharp collapse in oil prices, again, which has a lot to do with the credit markets and that set of things. What's the potential effect from the volatility? Again, as I mentioned, we're in a recession. We're going to see, again, not new or surprising to everybody, the jobless claims are going to go through the roof. We're going to see a sharp, sharp decline in GDP for the quarter and for the year. We, as a firm, revised down all of our numbers for GDP for the second quarter and for the remainder of the year. At the end, we'll talk about what should you, as investors, consider, whether it's in your personal money, whether it's in corporation money, whether it's your 401k account, whether it's your personal account. Just go through and ensure that you have plans that are aligned with your goals and your objectives. I'm going to talk about diversification in your portfolio and rebalancing, and then just looking at higher-quality assets going forward. Again, rapid and historic declines in the financial markets. You can see on the chart on the right-hand side, again, this is as of last week, but it is the sharpest decline in history, days from market peak to a bear market, meaning a 20% decline or more. You can see it took 21 days. The shortest time period prior to this event in this time period was, again, you can see the Great Depression and then the crash of 87. Those were all 40 to 55 days. People ask, one of the things is, why is it so rapid this time around? I think part of it is the environment that we're currently in and just the times that we're in today. I read an interesting stat in one of our research reports three weeks ago. I think when this all started, you started seeing the first 1,000-point drop in the market. It's an interesting fact that today, in today's environment, today's world, 80% of all cash trades, so all trades done, are done by a computer and done by algorithms, so algorithmic trading. It's no longer the old days when you think about your grandparents or your parents. You're sitting there saying, I want to buy stock, and you pick up the phone, and you call your investment advisor, and I want to buy stock, and you have a conversation, and the order is placed. Eighty percent is all done by a computer and actually by computerized algorithms. It's not even the simple, you and I are buying and selling individual stocks in our account. It's actually the computerized algorithmic trading firms trading the markets. They just have certain algorithms in there that, when the market goes down a certain percentage points or a certain point drop, that it either buys or sells, and most of the time, on the downside, it sells if it hits a certain level, and then it sells again if it hits a certain level. All that continuous trading continues the market to go down. I think that's historic in that we hit a rapid peak to decline in the shortest time frame. Then you can see equity markets, as everybody's aware, have given up all their gains. Again, this is as of last week. You see the market decline, but as of last night, as of close of business last night, you had a stock market that, for all intents and purposes, anywhere you invested, with the exception of China, which I think is interesting, down roughly 20 percent to 40 percent. Your Dow Jones Industrial Average, through last night, was down 27 percent. Your S&P 500, 500 of the largest U.S. companies, down 24 percent. If you had any exposure to small and mid-cap, which, again, if you have a diversified portfolio or if you're in a retirement plan, you have some type of target date fund, you have exposure to small and mid-sized company stocks. Those are down, on average, 35 percent through last night. If you're invested internationally, you're down 31 to 33 percent, depending on where you're invested internationally. You might say, again, if you're in some type of diversified portfolio, basic fundamentals of investing tells you to have a little bit of international, a little bit of small and mid, so you do have portions of your portfolio that are down 30 plus percent. Interestingly enough, as I mentioned, Shanghai is down 12 percent, so Chinese markets have rallied and come back, I think, as they're starting to stabilize over there. People then typically look for safe havens in terms of alternatives and commodities and fixed income to offset their portfolio, and that's where, again, Paul will talk about the typical bond fund. If you own a bond fund and you have any exposure to high yield, then your typical bond fund is down as negative for the year as well, because high yield bonds are down almost 20 percent through last night, the high yield index. If you're a tax-free investor, because of the dislocation in the municipal market, the average municipal bond, so if you just said, I own tax-free bonds, they're down 7.5 percent. The bond index, the aggregate bond index, is positive 1 percent. Again, where's the safe haven? Cash, and then gold. Gold is up last night through about 9 percent, but if you look at commodities in general, if you said, well, I'm going to own commodities in general, because of the sell-off in oil, oil is down 61 percent through last night. Your commodity index is down 21 percent. Copper, down 21 percent. Again, there really has not been a whole lot of safe place to hide, except for cash, and we'll talk about that, what you should be doing. Again, historic and rapid dislocations in the financial markets. I talked about volatility. This time period, you can see on the left-hand side, from a volatility standpoint, is the highest we've ever seen. But as you can see here, volatility spikes, and then it rapidly falls. So you can see on here, the last 30 years of volatility, and you can see when times are volatile, it spikes up, and then things stabilize, and the volatility drops back down. And a lot of time, that signals that things are starting to stabilize, and it's a good buying opportunity, and we'll talk about that, and where our metrics are at. Long-term, markets go up. You can see that on the right-hand side, the S&P 500. We've had multiple downturns. We've had multiple 20-plus declines in the market. And as you look in here, the trend is still positive. The markets continue to go up. Last week was the day for the record books. We saw it's the third worst day we've had in the markets. March 16th, a down 13% day in the sell-offs. So again, we're seeing historic times, but as we have in the past, we will get through this. And the key to getting through this is time in the markets, not timing the market. And I think that's very important. One of the greatest investors of our time, Warren Buffett, has a saying of, Be fearful when others are greedy, and be greedy when others are fearful. But we as investors let our emotions drive a lot of our investing behavior a lot of the time. And as you can see here on the chart, if you took out the 10 best days of performance for every decade, you can see what it drastically does for your return. Let's just use, for example, the most recent decade. If you invested in January 1st of 2010, and you left it sit, you're 190%. If you missed the best 10 days out of the 10-year period, your return went down to 95%. And you can see each decade. If you say, well, which is the best? Okay, we had pretty good years. Go back to 2000. Look what happened in 2000. Okay, that 10-year period was a really bad year. It was the worst 10-year period we've ever had in our markets history. You had 2000, 2001, and 2002 in there, down 56% plus in that time frame. But if you missed the best 10 days, you can see what the difference of your return was. And so staying in the market through these volatile times and letting that market rebound and help you and benefit you really pays off in the long run. And so again, one of the key takeaways from this is to stay invested and have an allocation that's appropriate for your goals, your risk tolerance, and your time horizon, and stay invested, stay in the markets, because these markets will rebound and will come back. And so again, the first takeaway from all this is just remember, it's time in the markets, not trying to time the market. You know, the next thing we're going to talk about is just the crisis background and context. And again, a lot of this is old and it's been out in front of us now and out there, I think everybody's aware of it, but, you know, catalyst one of the market sell-off, again, was the COVID-19 outbreak, right? It's risen, you know, with the new COVID cases coming up every day, right? And you can see, you know, the number of cases has increased and that's what's caused, you know, a lot of this market to slow down. We put out a report actually last week that talked about, you know, are we at the bottom end? Are we getting close to the bottom end? And we went back and looked at every single bear market that there was going back through history. And there's typically six things that happened that kind of shows that we were at the bottom. And as of last week, we had, you know, roughly four, almost five of those, and the big one that we're still waiting to see is for things to stabilize from a Fed or, you know, from the policy standpoint. We saw some of that earlier this week. We're seeing that today, right, that, you know, the fiscal policy is going to come out and help it. So I think you'll see that stabilize. And then the number one, another factor in that as well is that the number of cases around the globe starting to stabilize, right? I think you saw this, you know, I was seeing this morning that Italy, you know, was stabilizing and just waiting to see when we stabilize here. So again, it's not just COVID though, right? We had, you know, a catalyst of the oil price slump, right? And so we already had weakened markets, we already had, you know, slowing economic growth, and then we have the, you know, Russia concern over rising U.S. market share causes the breakdown with talks of OPEC and a huge slump in oil prices, right? And so when you take two of these catalysts and put them together, it's why we saw the sell-off, right? I don't have the crystal ball, we're not, you know, we don't know, and somebody asked me, well, if we didn't have the sell-off in oil, would COVID have brought the markets down as much as it had? I don't have the answer to that, but just going on my 20 plus years of working in this industry and working at Merrill Lynch, you know, probably not as bad. And then likewise, somebody said, well, if we didn't have COVID and we just saw the drop in oil, would we be as bad as we are? Based on history, probably not, right? We've seen oil drop other times of the year, as you can see on the chart here, and the drop hasn't been, you know, as bad or nearly as bad as it is now. So when you combine those two, you know, is, you know, the catalyst for why the market is so bad, again, you can see in oil on the screen, as I mentioned, right, we've seen up to these figures in the past, right? As I mentioned, through last night, oil is down 61%. We just saw in 2014 and 2015, oil down 60%, right? The S&P during the oil decline was actually positive, right? There's been other times where oil has been dramatically down, right? Again, early on in the 80s and 90s, and the market's been positive. So again, if we didn't have COVID, would the drop in oil cause the market to be down as much as we have? Probably not. If we didn't have oil, would COVID, you know, cause the market to be down as much as they were? Potentially. We're just unsure. So, you know, along the lines then, what do we do? Again, there's been policy responses and economic impacts that have helped. Again, as I mentioned, this is as of last week, when we put this out and, you know, we're downgraded global growth, right? And we came out late last week and early, you know, this week, we came out and said that we are in a recession. We are forecasting negative 12% here for the second quarter. In Q2, I think J.P. Morgan came out yesterday and said negative 14%, right? So kind of closing some lines. I know Mark's going to touch on some of this, but again, our full year, what we're expecting from the full year GDP now in the U.S. to be, you know, just under, you know, down one-tenth of 1%, so down 0.8. In global GDP, you know, as of last night, to be, you know, just barely positive at 0.3. And so, you know, again, with all that, it has, you know, really slowed the economic growth. I know there's a lot of talk and that's all that was on CNN last night was, you know, is the shutdown of the economy going to hurt us more than COVID? And nobody knows, but we just released a report this morning, again, that, you know, we think that's probably not a good idea to reopen sooner than later. We think that in the long run end up hurting us more. But you can see here, you know, again, the global monetary fiscal response from the different nations, right? You know, everybody globally from a monetary standpoint and fiscal standpoint are stepping in to help us. We're still, you know, again, our markets are not stabilized yet because they're waiting to see what's going to happen. There was expectations it was going to be $1 trillion. I'm sure everybody saw this morning that it's probably going to pass and it's going to be $2 trillion of fiscal response. So we think that'll help start stabilizing markets. You know, again, summary of kind of where we're at, you know, the health response, I think everybody's aware of from a monetary response, right? Emergency meeting with the Fed, they cut rates to zero, $700 billion of QE, purchasing treasuries and mortgages. And then, you know, Paul, I'm sure, will touch on just briefly what they did this week and unlimited buying and so forth. But again, fiscal response is out there to help us, you know, they've stepped in a few times to try to, you know, curtail this, right? And again, you know, the 100 basis point Fed cut is done already. We saw that today. So again, a couple of these slides just because of the quick movement are outdated. But again, asset class performance, this is something I think is just looking at asset class performance between or during other recessions. And you can see the different drawdowns, right, in the U.S. markets, the international markets, and then, you know, treasuries and fixed income in the corporate world, right? One thing I think, you know, Paul will touch on is just that this time is different, right? And I mean, everybody's looking at this and saying, this is just like the financial crisis of 08 and 09, right, and it's not, right? You know, banks are a lot more capitalized. There's a lot more liquidity on balance sheets this time than there was last time around. And so, you know, it is different, right? You're not going to see and I think that's why, you know, the markets will rebound a lot quicker this time than they did in the financial crisis because it is different. And again, we'll talk about that when we talk about the credit markets. This looks at, again, examples in the equity markets, and it's really hard to see, I'm sure, if you're looking on your phone or in fine print. So we do have this, but this is going to put this on the screen, or excuse me, on the website for everybody to download and look at in detail afterwards, but, you know, what we look at here is just look at the length of the drawdown in previous recessions, right? And I've had people say, well, this time is different because COVID is going to last longer and there's a lot of unknown, we don't know when it's going to stabilize. You know, there's an old saying, in everything you see on an investment, I'm sure it's on here a thousand times, it's past performance that does not, you know, guarantee future results, but history does repeat itself, right? And so, you know, that's what we go back and look at is that we look at the last drawdown and you can see when, you know, the S&P is down double-digit returns during other recessions, the length of the drawdown and the time it's taken, the length of full recovery, right? Historically, historically, right, we always say that following a recession or double-digit downturn, it used to take about a year, year and a half to where you're fully made back everything that you lost plus some, right? We actually think that this time, because of the rapid downturn, that this time is going to be different, it's going to be a lot quicker, right? Along those lines, while we forecasted, you know, negative 12% GDP growth for the quarter and really slowing economic growth and GDP growth for the full year, we actually did come out, you know, this week and reiterate our 3100 price target on the S&P at year end, right? And so, we think that you're going to see rapid growth and growth pick back up from an economy standpoint in the third quarter and fourth quarter and that it's going to be a very quick recovery, right, that, you know, and again, we're at 3100, I think I saw last week Goldman Sachs came out, again, just giving you different perspectives from different firms on Wall Street, Goldman Sachs came out and said 3200 on the S&P by year end, right? And so, you know, when you look at that, that's, you know, from where we were at, you know, two days ago, that was a 30 plus percent return, from, you know, yesterday, it's probably, you know, 20, 25, 26 plus percent return in the equity markets by year end. And so, we think the recovery is going to be a lot shorter, but if you think about it, right, you got, you know, and even if you look in here and you put it on length of recovery in days, if you say by year end from where we're at now, that's nine months, right? So, nine months is 270 days, right? And so, you know, kind of in line with and we think it's going to be probably quicker than in line with what some of these other length recovery days are and have been. Just checking the time here. So, again, equity and fixed income markets, long-term context and diversification, right? Short-term investing by long-term investing and this goes back to the, what I was talking about before about time in the markets, right? And I like this first chart, right? Because everybody else says, well, there's risk in the stock market. Absolutely, there's risk in the stock market. But you got to look at what your time frame is, right? If you have 10 years, right, before you need the money, so if you're investing in a retirement account or you have money, say, I don't need it until I'm retired or I don't need this for a 10-year time frame, right? It's close to a 95% probability that over a 10-year period that you will not have a negative return in the stock market, right? And so, you can see the longer time frame you have, the better the probability of not having a negative return in the stock market, right? And the other thing to look at is what are we doing now? So, again, for time in the market and then take advantage of these equity prices, right? Markets are off 25%, 30%. What I've been telling investors is you were investing in the stock market in January, right, or in December and you like the stock market there, well, guess what? It's on a 30% discount right now. And more importantly, there's been historic movement in interest rates that have caused interest rates to go really low that now you look at equities from an income-producing standpoint, that equities from a dividend standpoint look a lot more attractive, right? You know, you can make the case that I'm getting, you know, 2 plus percent yield on a good, high-quality stock, right, versus, you know, 10-year treasury at, you know, less than 1%. And so, if you're looking for income, right, you can make the case that, well, the volatility is and the downside risk in my stock has probably gone a lot lower and the probability of it going much lower is really low. And so, I'm going to pick up 2 or 3%, maybe 4%, you know, yield on some things, notwithstanding energy, on some good, high-quality companies and that's how I'm going to earn my income as well as I'm going to potentially have substantial price appreciation if I continue to hold that stock. So, again, looking at things from a short-term standpoint and from a long-term standpoint. Again, I got ahead of myself here, but, again, looking at the S&P yields versus the 10-year treasury. So, if you're looking at yield and, again, looking for income, you can see the historic, you know, environment that we're in versus, you know, yields on the S&P versus yields on 10-year treasuries. This is off a little bit. Again, it gives us the data thing, right? We saw treasuries' yields touch historic lows up until, you know, the middle of the bubble and they still are a lot better than treasuries, right? And the yields on treasury or, excuse me, on municipals have really gone up. They're at historic highs and, again, that's just because of the liquidity. And when I say liquidity, and, again, Paul will touch more on this, but it's not liquidity that there's not going to be any money there to pay the interest payments on these bonds, right? Same thing with the corporate markets. It's more of a liquidity issue in terms of supply and demand. So there are corporations out there that want to issue short-term paper that have enough on their balance sheet to make the payments. It's not a liquidity issue there, but there's no buyers for it. And so the Fed stepped in to help that, which we think, you know, you'll start to see that market stabilize over the next, you know, week or two weeks, three weeks. But, again, we're seeing historic lows in prices of bonds with spreads between treasuries and corporates and municipals at all-time highs. Again, presents opportunity. Showed you, you know, just showing you the historic spreads between, you know, oil, COVID, the financial crisis, energy. So what are the themes that we've put out and what should you be doing? People are always asking like, well what should we be doing? What type of themes should we be investing in? We agree with you that we should be buying. The market at these levels, what should we be buying? What are the themes that we have put out? So you can see there are a couple themes. We have a number of them. As you can see, a lot of them are all around technology and healthcare, right, automation. And so global healthcare spending, the theme there is gonna be demand for medical services, hospital equipment, et cetera. Cloud computing, we're doing this via webinar because everybody's working from home. We think that's gonna continue. We were just having a discussion last week and earlier this week with our team and saying that once this is all done, one of the areas that might be cause for concern is the corporate industrial or corporate REIT market, right? Because if everybody's home working for a month, right, telecommuting and working from home and doing virtual meetings, and it's, as of right now, it seems to be moving along pretty seamlessly. I think corporations are gonna take a look at that and say, wait a minute, we were home for a month and it worked seamlessly. Why are we paying this huge lease on this office space when we can reduce our costs and streamline our business and have more people telecommute, or excuse me, telework and work from home? So I think we're seeing more of that cloud computing, online retail, right, not so much the brick and mortar. So those are the themes, as you can see on here, that we're looking at and industries we're focusing on going forward as we put money back to work in the stock market. Diversification, right? Diversification helps, especially in times of stress, right? It's amazing, you know, everybody watches the news and listens, and here's what I just said, is, hey, I'm down 25% and the market's down 30%, and we do reviews with clients, and they sit there and they realize they're only down 15% or they're down 14%. Why? Well, because diversification, right? Diversification works. There are periods of times when diversification doesn't work, right? Last year is an example of that, right? If you look on the chart here, right, we have our moderate allocation portfolio, which is around 65% stocks, right? So you can see here is the dark blue box with the red line around it. Last year, people were saying, why am I only up 19% when the market's up 31%, right? U.S. large cap growth, if you were, you know, technology and large growth, you're up 37%. Why am I only up 19? Well, because you don't have the exposure. Well, why, should we put more in stock? Should I have more, right? Again, that old saying, fear and greed, right? When the markets are up, people want more, right? 15, 16, 17, same thing, right? People are like, the equity markets are up, you know, 16, 16 and 17. Why am I, you know, not up nearly as much? Well, because you're not taking the risk. You're not taking the exposure. Why are we not taking the risk? Why are we not taking the exposure? Because you don't need to, right? And we're also doing it in times of stress, right? Look at, you know, you're thrilled to be up this year, you know, down 15% versus down 30, right? And so, again, second takeaway from this is have a diversified portfolio, right, that's appropriate for your risk tolerance, your time horizon and your goals, right? Review that. Different parts of the market move in different ways and you wanna be able to make sure that you have those parts when the markets are in stressful times like they are now. Right, again, this is as of last week, Mark's gonna touch on, you know, the market and the economy, kind of where we stand today. But, you know, one of the things that I'll just add and then I'll let Mark, you know, touch on a few things here on the market is just that this week on Monday, we have a bull bear indicator and it's based on investor sentiment, right? It hit the lowest point. So, it's a zero to 10 scale, right? With zero being ultimate bearish, meaning people are gonna do with the stock market. We hit the lowest point we've ever seen in history on Monday, 0.4. Have to abide signal, right? So, from our investor sentiment signal, right, bullish and we actually were rebalancing portfolios and putting cash to work on the dips, you know, last week and the week before and then we went in and rebalanced portfolios from an equity standpoint, right, this week, meaning taking, selling bonds and taking the cash that we've had from bonds and putting it, that have done well and putting it to equities. You know, middle or first part of March and April, one of the things that we did as a firm and as a team was take our money out of longer bonds, right, we saw the interest rates hit the lowest they've ever hit or been and bond prices go up, so we shortened our duration. So, you know, things that we have been doing that, you know, hopefully all of you have been doing or if you haven't, you should be doing is just looking at your fixed income portfolios, taking the gains out of your fixed income portfolios and your bond portfolios and maybe looking at, you know, rebalancing and putting that money to work. Mark, do you wanna add some comments on just kind of where we stand from, you know, a firm's viewpoint on the economy, the markets as of today? Yes, thank you. Thank you so much, Mike. And good morning, everyone. As Mike mentioned, my name's Mark Sullivan. I work on behalf of the Chief Investment Office here at Merrill Lynch. And I first just wanna thank everyone for your time and Mike for a great introduction. Very good summary points. I'll try to resonate some of those points throughout some of the brief comments I add. But what you'll hear is a synchronization of some thought that comes directly from our Chief Investment Office. And then we'll hand it over to Paul Pezza at PIMCO But first, I'll just say thank you for your trust in Mike and his team. Obviously, you have a terrific team and hopefully you know that, obviously. And obviously, as in partnership with the Chief Investment Office, we try to deliver the best intellectual capital that we possibly can on the street. And so, as I begin to kind of reflect where we are today, the issue at hand is obviously one that is unprecedented. You know, we've got a three-prong issue, one being health. You know, we continue to hear Dr. Falsi speak to where we are today across this health spectrum. And while we're seeing some incremental positive and good news, there's still clearly some fear in what's ahead of us in some of the news that the health issue has caused with COVID-19. You know, secondly, you've got an economic issue, right? You know, you heard Mike talk about some of the slowdown in the data. I think that this is just a natural consequence of lockdown. I mean, when you tell human beings to stop spending, you're going to see a seasonal gap in spending and a seasonal gap in profitability. Our hope is that when we can restore this, we will see some of that rebound quicker. And Mike alluded to that in some of what I'll call is a V-shape versus like a U-shape or a W-shape. These are all technical terms you'll hear across the stock market if you were to look at some of the charts as you plot, you know, the demand and supply on these prices. And the last thing that I think is the issue at hand is our markets, right? So the markets is one that is bent entirely on liquidity and confidence. And so what we've seen in this recent stimulus package is one that from a morale standpoint, I think is one, a response that equals the panic and the distraught nature of the markets. And so I think that it was a commensurate result of where we are today. And so what we're seeing with this federal reserve as well as fiscal monetary policy response, coupled with our monetary drop to zero, obviously the interest rates are as low as we can make them. We are seeing the best response that I think, I think a real big blood trauma impact to our best foot forward in responding to this crisis. So health, economic and markets, I think it's important to look at everything in perspective because if you look at the news, I try and do as good a job as I can and kind of slipping through some channels and getting different perspectives. And one thing I noticed that is a theme more than anything else, because you're gonna either hear some positive or negative news depending on whatever statistic you wanna ray on. But one thing you are hearing is behavioral responses more than anything else. And so we need to kind of separate fact from fiction, fact from opinion. And so Mike did a great job. Thank you, terrific job. It's kind of delivering to you some facts. I wanna kind of forward play some of those facts out a little bit in a different context. And then I'll summarize a couple of opinions I think that we think as part of the chief investment office that underlying really the best direction moving forward. So when we separate fact from fiction, you're gonna hear so many things, but the reality is there's three different types of bear markets. The first one is a structural bear market. 2008 was one we saw where it was a man-made imbalance between supply and demand. And obviously with that breakdown of the banks and the economic system, we had to deliver an economic and policy response that was commensurate to that crisis that we were in. So again, structural. Cyclical is a second type of bear market we see. We can see that, for example, in 2000 to 2002. The economic imbalances were basically ratcheted up through incremental federal reserve hikes that bled the market dry and obviously distorted some of the asset prices that we saw. It's more long drawn out in more of a cyclical bear market, and it hurts the economy in totality a little bit more in its fervor. The last one is what we see as an exogenous bear market. And this is one where we see very, very sharp corrections. From peak to bear, as Mike illustrated on one of the charts, we saw two times the quickest peak to bear market that we've ever seen going back to the Great Depression. It was actually startling to see. But what we see in these types of exogenous shocks and these type of bear markets is more quick targeted rebounds, more of that V or that U shape or the extended W that eventually we hope to rebound out of. So what we see historically is when we see an exogenous shock, think about 9-11, COVID-19 being, of course, one of these as well. We hope to see market rebound in a one to three month timeframe. So when I look at kind of a trading range of where earnings and valuations are and PE multiples, things we won't get into depth today, but we look at really kind of that stabilization point in the S&P being 21 to 25, 2600, and that middle point being that December of 2018 low, about 2350. So what we're seeing today with the health scare on top of the economic and the market issues is one where we find it very hard to value assets right now. So all of the stock market is a voting machine on really the valuation of underlying assets. And right now we have more fear and contagion than we do have the ability to price an actual profit stream or a valuation cycle into some of these companies. But we have seen, obviously, as Mike denoted, some very dramatic moves that I think that there's some excellent opportunity when looked at from a long-term view. So valuations will occur, will be more important the more we solidify this health concern, which will then put our economic models back in place, which will then cause markets to stabilize. And when I look at indices, and Mike mentioned some really good statistics, 50% of the marketplace, he mentioned some of the trading, what's happening with algorithms, but also 50% of the marketplace is passive. And so market and price-weighted ETFs, we look at the biggest ones throughout the market, like a Vanguard, you're gonna see a lot more volatility throughout these products and throughout markets because of the pile-on effect of the selling. So as soon as we get clarity on economic activity, then we can price models that put into more consistent and more accurate forecasts. So we're hoping this is more of a shorter-term exogenous shock to summarize some of those points. As I look at where we are today and where we wanna go moving forward, I look at five components that we need to watch as we start to form a bottoming process. The first one is capital markets need to flow more freely. All right, so this is beginning to happen. Obviously, the stimulus package will be a great aid in doing this. The Fed has become the market maker. Banks have become lenders to our real economy. All right, so we're doing everything in our power to get these banks capable and willing to provide the liquidity measures in the market. And the Treasury has now become the guarantee. So with that, and this is why it's a good segue to hear Paul in just a minute or two, is we wanna watch where credit spreads go. We wanna watch where the commercial paper market is because that sense of fear across the liquidity is what we wanna see alleviate. And we're starting to see signs of that demonstrated clearly through a unprecedented policy response from the Fed and Treasury. The second point I wanna mention to watch is that bonds and equities need to start returning to their inverse relationship. So as you saw the stock market crash, you saw bonds go down as well. That is a correlated relationship, right? So you saw yields continue to decline. And so with this measure, we're not seeing that typical relationship of a stock market goes down, bond prices go up, and so the stocks should look more like the yields, okay? And so when we start seeing that, we will start seeing more of a sign that this is kind of that bonding process and the confidence factor moving forward. So we're starting to see some signs, but we're just not there. That should be another couple weeks in our view. The third point I wanna make is the volatility. Mike mentioned this, the volatility needs to recede and down market. So when we see your sell-offs, we're gonna continue to see sort of these panic selling depending on where we are emotionally and behavioral day-to-day on news. But we would like to see the VIX, or that volatility measure, reduced during these sell-off periods. And so the market goes down, we wanna see the VIX go down. And so that's another third measure we'll wanna watch. The fourth measure is the dollar strength, which we've seen as you can kind of compare the dollar across the global spectrum is the fanciest house on the street. And so as we see too much strength in the dollar, that really pretty much cripples emerging markets and overseas valuations. As you start seeing this dollar strength crest and recede, that is going to be a tremendous sign of that moving forward position. Again, that's again kind of cryptic to our exogenous shock type bear market. We typically see that about one to three months. Lastly, and I'll provide some summary comments and turn it over to Paul, is the bad news on this virus, the lockdown, the economy, the news that keeps fumbling our citizens every single day, we need to start seeing that be non-discriminate in what we're seeing the markets do. Said differently, we wanna see the market start to discount what the news is saying, and the health scare, the lockdown, the morbid death rates, to put it bluntly. As these continue, and by the way, we're starting to see good positive news out of this camp when you start to look at the statistical figures that Dr. Fauci and his team and staff are bringing forward. You put some of the best minds together. We're seeing some of the supply chains improved. And so as we start kind of corralling this fear and contagion, we hope to see those five components to watch. So to summarize this, this shakeout depends on this virus. This will impact the economic profits and kind of our valuation models. But we concur with everything Mike has said, that these are opportunities to be risk adjusted according to your levels of risk, your goals, your time periods, and how you see your financial situation. So Mike and his team are terrific in laying out a financial plan. So you don't have to worry about the volatile market assets today. In fact, in the natural process of rebalancing, what we've done from the chief investment office standpoint in our portfolios, if we've reduced fixed income portfolio duration, as you saw those yields reach levels we've never seen before, we took some of that risk out of fixed income. And then we used an opportunity to, without moving markets and very seamlessly, start to rebalance into your tactical allocation weightings for your long-term goals. So to put kind of simply, a moderate might've been undersold on equity and a little bit overweighted on bonds. As you do that rebalance, you are naturally and systematically part of a disciplined rebalancing process. You are selling at higher relative asset values and buying at relatively lower asset values and maintaining your risk objective for your long-term goals. And the last point on that is that is crucial that I just wanna put an exclamation point on is, and that's all good and dandy if you experience time in the markets and not timing the markets. We could go on through statistics that might kind of denote as some of the major ones that I think are most pressing. But if you miss even a few capture days, then you almost blow your financial plan off for the long-term duration. And so it's very important that you stay invested, stay rebalanced, stay part of the process and the discipline. And some of the things that we're looking at is high quality assets, growth in tech will lead us out as well as yield. The last point I'll make on stocks is that there's nowhere to run in the fixed income markets in terms of yield right now at current levels. They're obviously very important from an asset allocation and diversification standpoint, but also you start to look at some of these companies that are great American companies. And even globally, you start to look at how much are they're paying you to wait in a volatile stance versus where you can get on a 10-year treasury. And to me, it's all about the timeframe that you have to wait for these markets to rebound, whether it's one, whether it's three months, whether it's six months. Mike mentioned the economic activity we anticipate. We concur that we do anticipate a third and fourth quarter rebound. It's going to be a rough quarter or two. However, we are resilient. Our US economy is more resilient than even our global one. And we see this rebounding faster than the like. So again, I'll just reiterate those points and kind of press that exclamation point as my final summary. With that, I'm going to pause. Thank you all for your time and a couple minutes of sharing some points from the Chief Investment Office. And I'll turn it over to you, Paul. Thank you. Thanks, Mark. Good morning, everybody. My name is Paul Pezza with PIMCO. I'm an account manager here in the Chicago market. Thanks for having me today. I know we're coming up on an hour here shortly. So I'm going to keep my comments relatively brief. I'd like to touch just a couple minutes, a couple points on our macro view. And then give you an update on the credit markets and how we're thinking about it at PIMCO. First, on the macro, I know a lot of this has been touched on. But our base case, obviously, recession is now inevitable. This is unique because it's the first recession not caused by manufacturing. It's happening because of the service sector. And there's four shocks that have triggered this. One is the supply shock. We saw it start in China. China is the global supply chain. It can also account for 25% of global manufacturing. It's now making its way to the U.S. We think this will weigh heavily, to Mark's point, on Q1, Q2, and even Q3 at this point. Number two, we've had a demand shock. People are stuck at home. There's no demand. You know, the social distancing, travel moratoriums, quarantines clearly are going to hit consumer demand for services, travel, tourism, et cetera. All the retail stores closed. That's going to have, obviously, a big impact. Third is the financial shock. And I want to touch on this for a second. We've seen a very serious tightening of financial conditions, as evidenced by the stock and bond sell-off over the last month. The difference, as Mike pointed out earlier, between today and 2008 is the speed with which it occurred. Unprecedented, 22 trading days for the S&P to fall 30%. But what we also see and have seen is the liquidity. And this is really important. The liquidity has been very poor. It started to improve, but it's been due to a massive force selling by retail investors, institutions, mutual funds, asset management firms, hedge funds. Investors are literally selling what they can, not what they want, which is why you see in AAA, AA means negative performance. We've seen investment-grade, high-quality companies, corporate debt down 11% year-to-date. Spreads have gone from 95 January 1st to over 350 basis points over Treasuries. And at investment-grade, we are in high yield. The riskiest part of the credit markets has gone from 340 basis points over Treasuries to 1,100. So we're now surpassing all of the 2016, 2013 credit spread widening. The worst was 2008 when we got close to 2,000 basis points, but high yield is down 18% for the year. So, you know, liquidity has been a real challenge. It's a market liquidity issue. The fourth shock, obviously oil, Mike touched on that. I'm not going to go into too much detail, but our view at PIMCO is that we are not going to have this V-shape economic recovery that some economists are calling for. We believe it's going to be more of a U-shape. You know, under that assumption, you know, if we can get a grip on the virus, constrain it, we see recovery second half of the year, but most likely not until the fourth quarter. How big? We don't know. Estimates keep changing. Our best guess is that GDP is going to see a mid-team decline. I've seen estimates of, you know, 30% negative, but to put this into perspective, in 2008, we saw an 8.5% decline in quarterly GDP. So look, the good news is we don't have the excesses that we had in 2008. Banks are well capitalized. Consumers are much better placed. So the recovery should, you know, should be good, and we needed the response from policymakers. We got it in a big way. The Fed has stepped in with unprecedented stimulus. They're going to add close to $6 trillion to their balance sheet when all this is said and done. We got a $2 trillion fiscal passage last night that's designed to give relief to those out of work, support small businesses, stabilize key national industries, literally a wartime level of investment, largest rescue package in U.S. history. So that's good. The monetary policy has helped for three reasons. Number one, it's enabled this large fiscal response. Number two, it's ensuring continued flow of credit to the real economy. And third, it's restoring orderly functioning of the core capital markets. So the buying of treasuries and mortgages, given some of the big swings we see in that market, we think will go a long way to stabilize. So let me pivot to the credit markets now, just kind of big picture, with recessions in our base case. The investment-grade bond market is priced for a pretty bad recession. I mean, it's priced for 6% plus defaults in corporate bonds, in high-quality companies. And we just do not think that is going to happen. You know, look, we have direct access to company management. We're talking to these companies every day, sometimes several times a day, our portfolio managers, our risk managers. Companies in the U.S. are focused on the same things we are, liquidity, the path of the virus, how long they'll be shut down for, how effective monetary and fiscal policy will be. They are tapping the market and drawing down bank lines to increase liquidity to prepare in case that this is worse than people think. And the example that I have for you is Ford and GM. Both of those companies are sitting on $10 to $12 billion of cash. And despite that, they're still drawing down the revolvers because they want $20 to $25 billion in liquidity. So the economic effects are real. Companies, you know, are laying off workers who live paycheck to paycheck in industries like lodging, restaurants, cruise lines, airlines, expect aggressive layoffs, and people will need support, which it looks like the government is going to provide. In terms of downgrades, most investment-grade companies have the near-term liquidity to handle a three- to six-month shutdown, even in, you know, some weaker cyclical companies like the automakers. But what they can't handle is a 12- to 18-month shutdown. As I mentioned, investment-grade spreads, 350 over Treasuries, peaking, you know, the default at 6%. We think they're going to be less than 1%. Triple-B downgrades will happen. We have not seen that yet. A lot of the Triple-B companies that we own, telecom companies, cable, towers, we're strong going into this, non-cyclicals with solid balance sheets and have a significant liquidity cushion in the energy space. There's going to be some major pressure there, expect ratings, migration. Energy is really low on the list of industries the government might support. There will certainly be differences by subsector within energy. We think liquidity is still very strong in the midstream space. Midstream MLP companies could handle a one- to two-year recession just based on their stable contracts and cash flows. So if you own anything in the energy space, we think it should be the MLPs. In terms of liquidity, again, very challenging. It changes day-to-day and by region. We've seen better liquidity in Europe as a result of what the ECB is doing, whatever it takes approach. We see the potential for the Fed to come in with even more stimulus despite what they've already put in there. So in terms of positioning at PIMCO, what we're looking at, what we're finding opportunistically, financials. We're going to need the banks to get out of this. We've seen indiscriminate selling within the financials. You have net interest margins that are going to come under pressure, but we think they're well-positioned and have better balance sheet protection to withstand it. Spreads look very attractive and banks can certainly handle a three- to six-month shutdown. We also like consumer-related companies, housing, building materials, gaming, and it's really important, what we're doing, the work that we're doing at PIMCO is really distinguishing between the haves and the have-nots. We believe that the companies that are the haves in that category are the non-cyclical, the defensive credits, who have high-quality balance sheets, low leverage, again, these are the cable companies, the power companies, utilities. The have-nots, these are the cyclical companies with weaker credits where we were already cautious on, so that's, again, energy, autos, chemicals, to name a few. So we are currently starting to go on offense. We came into this in a very defensive position, managing risk, and being very, I guess, cautious on the cracks in the corporate credit cycle. I was on a call with the head of our corporate credit yesterday, Mark Kiesel, and he was ringing the bell. We've used this as a one-in-ten-year opportunity to buy high-quality corporate companies debt, very attractive yields, and prices that are in a much better valuation point. So this is what we do. Our advantage at PIMCO is having a long-term investment process. It's having resources all around the world, and we are looking forward to the opportunities that are being presented in this environment today. And lastly, I'll just say the comment from Mark Kiesel that resonated with me. He said, look, if the greatest generation in this country can get through World War II, we can get through this. Let me leave it there, and we can open it up. Great. Thanks, Mark, and thanks, Paul. Again, great insights from both of you guys. Again, PIMCO is a great partner of ours. We use them as one of our investment managers, a good name, and one of the largest bond managers out there, so it was great to get the perspective. And so coming up here on the close, a couple of thoughts is, again, Mark and I both talked about how what you should be doing is looking at rebalancing. One of the other things that we do in volatile times like this, when the markets are down, this 10, 15, 20, 30 percent is tax-loss selling, and I know that's on here. So for those that have taxable assets, take advantage of the opportunity to do tax-loss selling. Stay invested, but just get out of something and either go into an ETF for 30 days or another similar company for 30 days, so you're still in the market if we do get the rebound, but you're able to realize that loss. You can carry forward tax losses indefinitely. So again, another key strategy that we're doing in these volatile times. And then lastly, as markets face uncertainty, it's important to have a strategy. As I mentioned, we think it's time in the market that's rewarded, not time in the market. And the other good one is both in the blue is the environments of greatest uncertainty are usually when diversification begins to show its strength. So with that, Liz, I'm going to put up – if you put up the other slide that just has my contact information if you have any additional questions. And then we also have, you know, two links that everybody can use, and they're public links that you can go to on a daily basis. One is an audio cast that we put out and update about 2 p.m. Eastern daily, so you can go ahead and hear from Chris Heisey, our chief investment office, on a daily basis with our views. And then another one that has timely insights is just our market volatility site. So we update it every day or two with just different topics related to market volatility. So again, Liz, if you can just put that on the screen for everybody, that'd be great. So there it is. And then I don't know if there's any questions. Yeah, it looks like we've got one question. Is it anticipated the Fed will print money to fund the stimulus package? And what effect will this have on the strength of the dollar that you previously mentioned? Paul, you want to start? Or Mark, go ahead. I guess I can take that. Yes, thank you for the question. So we are seeing the Fed's response in dramatic fashion. It is both buying assets, which is, as you buy, you're keeping the yields low, keeping liquidity strong, and you're seeing that response unprecedented. And how will that affect the dollar? I think that you'll see that crest occur once you start to see kind of this play out, right? So the dollar, just on a relative standpoint, it's kind of a relative measure when you look across currencies. So once you see, you know, very dramatic fiscal and monetary policy, you would typically see in the form that we're seeing it, you would typically see a dollar weaken versus our respective peers. However, as I mentioned in some of my comments, today the U.S. is the strongest or the prettiest house on the block, to use that analogy. And so while we are still a safe haven or a flight to safety, we haven't seen that crest occur, but all of this will be a natural process as you see this liquidity and fiscal stimulus work through the markets and instill confidence. So yes, we will see that. We hope to see in the next two to three months. Yeah, just to add on to that, this is Paul Pezzi. The Fed's using their balance sheet. The U.S. government is going to issue debt to fund all this. There's no question. So, you know, what we've seen over the last decade is, you know, the consumer de-lever and governments all over the world re-lever. And, you know, so debt to GDPs are going to be going, you know, higher all over the globe to prevent a depression, really, with this pandemic. So, you know, the short answer is yes. There's going to be money printed and debt issued. That's a good question. Thanks. Yeah, thanks. Liz, any other questions? Yeah, one more. I heard you use the R word earlier. Is that official? Recession? As in the R word, recession? I think so, yes. Yeah, so from a firm standpoint, Bank of America, yes. We came out and put that we are in a recession, right? So has, you know, anybody from the U.S. government come out and said that? I don't think so. But from our standpoint, you know, we have come out and said that, you know, we are in a recession. Both our global economist, Ethan Harris, and our U.S. economist, Michelle Meyer, both agree on that. And we actually have a research report on that. So if anybody, you know, wants that report, you know, please feel free to e-mail me my contact on the screen and we can put that on there. But, Mark, do you want to add comments to that? Yeah, I was just going to add a couple of comments. Thanks, Mike. You know, recession, really, it's a semantics concept at this point. It's a really good question. Are we technically in it yet? I think the technical definition of a recession would be two quarters of negative growth. And so we're pretty much just discounting that as fact at this point. So I think it's a good question. It lends to the semantics involved. But, yes, the powers that be, our research, both at Bank of America Maryland's research and Chief Investment Office, does declare a recession situation that we're walking into. Okay. Thank you. Well, it doesn't look like we have any other questions. I want to thank Mike and Mark and Paul for joining us today. And if attendees do have any other questions, Mike's information is right there on the screen, and feel free to reach out to him. Thank you, gentlemen. We appreciate it. Great. Thank you. Liz, one last thing. I guess a little plug for the next two. This is part one of a three-part series. So next week we're actually going to have Joe Terranova from CNBC on the call to just give a brief market and economic update and Q&A with him. So, again, not going to go through the long, lengthy presentation, but just give some market updates and economic insights and Q&A. And then I think the following week, we haven't set a date yet, but we're going to have one of our industrial machinery analysts, he's one of the top analysts in the space, on the call for industry update as well. So just a plug for the next two that we're doing as well. Great. Well, thank you again, gentlemen. Thank you, everybody. Thanks.

market volatility

COVID-19 outbreak

financial markets

economic effects

policy responses

investor sentiment

portfolio diversification

long-term investment strategy

tax-loss selling opportunities

US economy