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Looking for something to read? See our Reading List; these books, separated by category, are

ones we find interesting and insightful. We will be adding to the list over time.

[Posted: May 7, 2020—9:30 AM EDT] Global equity markets are mixed this morning. The

EuroStoxx 50 is up 0.9% from its last close. In Asia, the MSCI Asia Apex 50 closed down 0.4%

from the prior close. Chinese markets were lower, with the Shanghai Composite down 0.2% and

the Shenzhen Composite down 0.1%. U.S. equity index futures are signaling a higher open.

With 383 companies having reported, the S&P 500 Q1 earnings stand at $33.60, lower than the

$35.51 forecast for the quarter. The forecast reflects a 10.0% decrease from Q1 2019 earnings.

Thus far this quarter, 68.1% of the companies have reported earnings above forecast, while

27.7% have reported earnings below forecast.

Good morning; it’s the 75th anniversary of Germany’s surrender in WWII. Despite expectations

of dreadful labor market data tomorrow, equity futures continue to move higher. The BOE

maintains current policy. We update the COVID-19 news. Our Weekly Energy Update can be

found here. Here are the details:

COVID-19: The number of reported cases is 3,769,150 with 264,111 deaths and 1,250,579

recoveries. In the U.S., there are 1,228,609 confirmed cases with 73,431 deaths and 189,910

recoveries.

For those who like to keep score at home, the FT has created a nifty interactive chart that allows

one to compare cases and fatalities between nations, scaled by population.

The virus news:

• The good news:

o Epidemiologists and health economists are working to discern which social

distancing measures are worth the cost. This exercise is an important next step in

establishing how society should operate in the absence of established therapies for

COVID-19. In this current stage, epidemiologists dominated the conversation and

were focused mostly on reducing infections. The next phase will be figuring out

which mitigation measures save the most lives compared to the costs entailed in

implementing them. This process will be difficult because we know so little

about the virus. And, it may lead to governments permitting activities only to find

that this was a bad idea. Still, this is progress because it is the process of learning

to cope with the virus being with us for the foreseeable future.

o There may be more UV light in our future; UV light disinfects the air and surfaces

but tends to burn skin and eyes, reducing its usage as a safety measure. Scientists

at Columbia have created a version of UV lighting that doesn’t burn skin or eyes

Daily Comment

By Bill O’Grady, Thomas Wash, and

Patrick Fearon-Hernandez, CFA

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that could be used as a continual disinfectant in public areas. If this works, it

would reduce the odds of transmission in public places and speed the return of

opening businesses and restaurants. We could see businesses, arenas and airports

have visitors pass through such light to reduce transmission of viruses.

o Mass testing has been something of a problem for many countries. Without

testing, it is difficult to know the extent of the virus’s spread. Researchers are

investigating if they can trace the degree of infection in a community in sewage.

It is known that the virus does leave the digestive tract. Measuring the “back end”

may tell mayors and governors that a problem is developing before it becomes

evident in hospitalizations.

o Here’s another drug to watch—EIDD-2801, an antiviral that is currently under

trial in the U.K. and will begin phase 1 in the U.S. later this month. It is designed

to work similarly to remdesivir but can be taken as a pill; remdesivir must be

administered intravenously.

o There is some promising work being done with llamas to create a potential

therapy for COVID-19. Their blood can generate unique antibodies to the virus.

The good news is that it would give a person immediate immunity to COVID-19;

the bad news is that the immunity wanes rather quickly, in one to two months.

However, it could be used to protect health care workers until a vaccine is

developed.

Germany, Europe’s largest economy, is beginning to reopen. Its reported cases

are in clear decline. The secret of Germany’s success was widespread testing and

general compliance with social distancing. Germany’s recovery would help the

EU economy, which, as we note below, is in very bad shape overall.

(Source: FT)

• The bad news:

o Coronaviruses are known to mutate. There are reports that the current virus is a

version that began to emerge in mid-March and is different than what originally

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came from China. The new version isn’t necessarily more virulent, but it may

replicate faster, making those infected sicker than what was seen in the initial

version.

o One debate governments are having is when to reopen schools. There is evidence

to suggest that children are less susceptible to the worst of COVID-19 and thus

probably face less danger in reducing social distancing (assuming, of course, no

preexisting conditions exist). However, there is a potential problem with

reopening schools—children may become vectors for COVID-19 by harboring

asymptomatic infections and putting their families at risk. We should note these

studies conflict with others suggesting children are not necessarily a risk.

o As noted yesterday, nursing homes remain an area of great risk for COVID-19.

o There are reports that France may have had a fatality from COVID-19 as early as

December. If true, it means the virus was circulating around Europe well before

February.

o Over the past few weeks, we have noted the various ways COVID-19 attacks the

human body. This report is a recap of what is currently known.

o There has been a rise in apparent suicides among Russian medical staff. It is

believed that stress related to COVID-19 is to blame.

The policy news:

• One of the issues we have been watching for is a policy mistake. The biggest is when

central banks or fiscal authorities inadvertently cause systemic risk because they didn’t

backstop a certain area of the financial market. The ECB may be introducing this risk

because it has refused, so far, to offer support to the European high yield market.

• In the U.S., there were provisions in the stimulus package to aid student loan borrowers.

Unfortunately, some borrowers, many of whom took out loans prior to 2010, find that the

provisions don’t include their loans. It doesn’t appear there was a rationale for the

exclusion and seems to be a simple oversight.

• There has been massive fiscal and monetary support to the economy. However, one area

that has been repeatedly rebuffed in getting support is private equity. The lack of support

shows how politically toxic this sector has become.

• There is also a political standoff brewing between the White House, which is pushing for

additional stimulus, and the right-wing establishment in Congress, which is becoming

uncomfortable with the level of spending. This is more of an intra-party conflict within

the GOP.

• Part of the stimulus package was a boost to unemployment insurance. In addition to the

usual state payments, the federal government is kicking in an additional $600 per week.

This measure was pushed by the representatives from large urban areas with high living

expenses. However, outside major cities, unemployment benefits exceed what many

workers were making before the shutdown. Needless to say, there is an incentive to

simply exhaust the unemployment insurance before returning to work. We are seeing

reports that some businesses, which have been given permission to reopen after

lockdown, are struggling to find workers, in part due to the generous benefits given for

not working.

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The economic news:

• Tomorrow, the BLS will release April’s employment report. As yesterday’s ADP report

showed, job losses are going to be historic. The current forecast is for a drop in nonfarm

payrolls of 21.0 mm. The largest previous drop in history, starting in 1939, was 1.959

mm in September 1945, due in part to war demobilization. The unemployment rate for

April is forecast at 16.0%. Although there are great hopes that the economy will rebound

quickly and workers will only face temporary layoffs, some businesses won’t recover

from this drop in business, turning temporary layoffs into permanent ones. At the same

time, some real time data does suggest there is an element of stabilization in the

economy; it’s not recovering fast but it isn’t getting worse.

• The economic situation in Europe is terrible. The EU warns that the virus has affected

nations differently and the uneven nature of the shock requires a unified response. The

BOE warned that the U.K. economy could contract by 25% in Q2.

• An idea that is emerging is the concept of the flexible lease. Currently, lease payments

are fixed; under normal circumstances, that makes sense. The building owner doesn’t see

his sunk capital costs drop in a recession. But, in the wake of the current downturn, some

landlords are showing openness to the idea of setting rent based on business revenue.

This could create some rather interesting situations; for example, a REIT may be valued

based on the business growth of tenants, not how well leased a building is. If this

practice were to become widespread, it would tend to turn real estate investments into

more of an equity product and less of a fixed income product.

• We have been documenting the growing problems in the protein supply chain. Stores are

beginning to put limits on meat purchases and prices are rising. Until we see processors

reopen, supplies will likely remain constrained.

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• One of the arguments used to end restrictions on interstate banking was that larger banks

would have economies of scale that would improve their efficiency and reduce costs.

This was more of a faith-based idea; there wasn’t much evidence at the onset that it was

true. In some aspects of banking, scale turned out to be important. The handling of

transactions has improved with concentration, for example. And, there is no doubt that

scale helps with creating and building technology. However, for relationship banking,

there is scant evidence that scale improves service, especially for smaller firms.

Community banks have proven this in the COVID-19 situation, being much more

effective in tapping the government programs to provide loans to small businesses.

• As we detail in the data table below, China’s April exports bounced unexpectedly,

although much of this may be clearing up the backlog from Q1. We also note that

Chinese car sales are starting to recover.

The market news:

• The battle for the USPS is underway. The postal service has been losing money most

years, in part due to its mandate to deliver letters. In general, delivery services make

their money on parcels, while regular mail is a loss leader. Delivery companies have

reduced the USPS hold on parcels and electronic mail has made letter carrying even less

attractive. In addition, the unionized workforce of the USPS makes it difficult for the

service to adapt to changes in the marketplace. The White House has appointed a new

postmaster and is pressing to renegotiate labor contracts and delivery arrangements that

are unfavorable to the USPS. We note that online retailers who tend to benefit from these

delivery arrangements are lobbying hard to maintain the current status and are asking

Congress for a bailout of the postal system.

• Years ago, we participated in a conference call with a client and her advisor. The client

wondered if she should buy one-ounce gold coins or quarter-ounce coins. We responded

by noting that four of the latter equal the former, to which the client said, “If I need to

bribe the border guards, am I better off with smaller coins?” We responded, “If we get to

that degree of societal breakdown, you will be better off with booze, bullets and

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tobacco.” Much to the chagrin of the advisor, the client agreed with us.1 Recent market

performance appears, at least to some extent, to support this notion.

The foreign policy news:

• Tensions with China continue to escalate:

o An internal report from the China Institutes of Contemporary International

Relations (CICIR), a think tank in China, suggested that the Xi government’s

handling of COVID-19 was becoming another Tiananmen Square in terms of

international standing.

o Op-ed columnists in Hong Kong warn that U.S. efforts to seek damages from

China over COVID-19 might spark a hot war.

o China is pressing the argument that its system was superior to that of the U.S.,

suggesting the virus has proven the U.S. is no longer the global hegemon. At the

same time China is touting its prowess, it is demanding that nations receiving its

aid “kowtow” and praise Beijing for its largess. Germany has reported such

actions recently.

o The EU is embroiled in a scandal where Brussels succumbed to Chinese pressure

to censor references to COVID-19 originating from China. However, a number of

European nations apparently didn’t get the memo and released the original

document.

o The U.S. is moving missiles and other weapons to the Pacific, continuing the

process of focusing on China and reducing America’s footprint in Europe and the

Middle East.

o The White House is continuing to encourage companies to reduce supply

dependence on China.

o The rise in tensions has, so far, not dramatically affected equities. But, if the

Phase One trade deal is scuttled because of the increase in hostilities, we would

expect a negative reaction.

• A surprising fight has emerged between China’s Finance Ministry and the PBOC. The

Finance Ministry wants the Chinese central bank to monetize its spending. In other

words, the ministry wants the PBOC to directly purchase its debt. It is unusual for such

fights to occur in the open; we suspect the battle is underway because the government’s

leadership doesn’t know how it wants to handle increased fiscal spending. We have been

noting evidence that China is reverting to its “tried and true” methods of boosting the

economy via infrastructure spending. Apparently, Chairman Xi hasn’t decided how he

wants to fund that spending quite yet. And so, the PBOC is pressing to maintain some

semblance of independence. There may be an element of entertaining a foreign audience

as well. It is becoming clear that the Fed is steadily seeing its independence erode. If the

PBOC appears to “win” this one, it might boost the status of the CNY relative to the

USD.

• Recent oil losses have not just affected oil producers. Retail clients in China purchased

products designed to follow the price of oil. Apparently, they were structured a bit like

1 Again, this is Bill’s story and he is using the imperial “we.”

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futures contracts; you can lose more than your initial investment. When oil prices fell

into negative territory last month, these speculators took losses they didn’t expect.

Apparently, regulators are pressuring Chinese banks to absorb some of these losses to

quell investor unrest.

• The impact of COVID-19 on Russia has been escalating recently. President Putin was

planning on a referendum of sorts and expanding infrastructure spending this year; both

have been disrupted by the virus. Putin has tended to foster close relations with the

Russian Orthodox Church, something a bit unusual for a former KGB agent. However,

social distancing rules have created divisions between the church and the government.

Although we don’t expect Putin to face any real threats to his position, he is clearly

having a rough time.

• An issue we are watching with increasing interest is Germany’s Constitutional Court,

which ruled that the ECB engaged in monetary practices outside of mandate and the

approval of these measures by the Court of Justice of the European Union (CJEU) were

in error. Germany’s court ruled that the ECB must give it adequate justification for its

bond-buying or the Bundesbank will no longer be permitted to participate in the program.

This situation is a problem on various levels. First, it violated the ECB’s independence

for a German court to dictate policy. Second, it clearly undermines the authority of the

CJEU. If Chancellor Merkel doesn’t thwart the German court, then she will be creating a

situation where the ECB may not be able to continue to act in any way that defies

Germany, and it will seriously weaken EU governing bodies. In some respects, we have

been expecting the EU and the Eurozone to eventually fall apart; without the Soviet

Union to act as a threat to work in concert, and without the U.S. providing costless

security, the EU and the Eurozone were in grave danger. However, we didn’t expect a

court ruling to be the event that triggers the potential breakup. We would not be

surprised to see Merkel try to resolve this problem; at the same time, it is hard to see any

other German leader with the power and authority to buck the court’s ruling. When she

is gone, the chances that Germany goes its own way increase. We are starting to see

other European leaders criticize the German court, seeing it as a threat to stability.

• On the topic of the ECB, the European central bank has been offering loans to European

commercial banks to maintain credit lines. However, the banks have been turning down

the programs because they are already burdened with bad loans from the last downturn.

In addition, the recovery in the EU has been rather sluggish anyway, meaning that many

companies were unable to grow out of their bad debt. EU policymakers have limited

capacity for fiscal spending and rely on banks for stimulus. However, if the banks can’t

be forced to lend, the support will fail to work.

• We have been keeping close watch on a number of GOP senators who have been crafting

a right-wing populist agenda. Their policy mix is based on deglobalization and anti-trust.

Who is involved? Sen. Hawley (R-MO), Sen. Cotton (R-AK), Sen. Rubio (R-FL) and

Sen. Cruz (R-TX). Hawley recently published an op-ed calling for the end of the WTO.

Three of the four sent letters to the White House calling for a suspension of temporary

work permits granted to foreign workers due to the virus-driven job losses. Anti-

immigration is part of this policy mix. Our position is that populism in the U.S. is on the

ascendency; the only question is the variant, i.e., right- or left-wing. So far, it appears the

right wing is winning the most influence.

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U.S. Economic Releases

In April, the challenger job cuts rose 1,576.9% from the prior year, a record. Although the report

reflects planned job cuts as opposed to actual job cuts, given the current economic climate it is

highly probable that a lot of these cuts will happen. That being said, the retail and transportation

sector saw the sharpest rise in job cut announcements.

Nonfarm productivity fell at an annualized rate of 2.5% from the prior quarter compared to

expectations of a 5.5% drop. Meanwhile, unit labor costs rose at an annual rate of 4.8% from the

prior quarter compared to expectations of a 4.5% rise.

The chart above shows the quarterly percentage change in unit labor costs at an annual rate. The

rise in unit labor can be partially attributed to a decline in real output per hour and a slight

increase in real compensation.

Initial claims came in at 3.169 mm compared to expectations of 3.000 mm. Last week’s report

was revised upward from 3.839 mm to 3.846 mm.

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0

1,000

2,000

3,000

4,000

5,000

6,000

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

FOUR-WEEK AVERAGE OF

INITIAL CLAIMS

TH

OU

SA

ND

S

Sources: BLS, CIM

FOUR-WEEK AVERAGE OF

INITIAL CLAIMS

TH

OU

SA

ND

S

Sources: BLS, CIM

The chart above shows the four-week moving average for initial claims. Currently the four-week

moving average is 4.174 mm, down from the previous week’s moving average of 5.035 mm.

The table below lists the economic releases and Fed events scheduled for the rest of the day.

EDT Indicator Expected Prior Rating

9:45 Bloomberg Consumer Comfort w/w 3-May 39.5 **

15:00 Consumer Credit m/m Jan $15.50 Bil. $22.06 Bil. *

Speaker or event

12:00 Neel Kashkari Discusses the Response to Covid-19 President of Federal Reserve Bank of Minneapolis

16:00 Patrick Harker Discusses the Response to Covid-19 President of the Federal Reserve Bank of Philadelphia

Fed Speakers or Events

Economic Releases

District or position

Foreign Economic News

We monitor numerous global economic indicators on a continuous basis. The most significant

international news that was released overnight is outlined below. Not all releases are equally

significant, thus we have created a star rating to convey to our readers the importance of the

various indicators. The rating column below is a three-star scale of importance, with one star

being the least important and three stars being the most important. We note that these ratings do

change over time as economic circumstances change. Additionally, for ease of reading, we have

also color-coded the market impact section, which indicates the effect on the foreign market.

Red indicates a concerning development, yellow indicates an emerging trend that we are

following closely for possible complications and green indicates neutral conditions. We will add

a paragraph below if any development merits further explanation.

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Country Indicator Current Prior Expected Rating Market Impact

ASIA-PACIFIC

New Zealand 2 yr Inflation Expectations q/q 2q 1.2% 1.9% ** Equity and bond neutral

China Foreign Reserves m/m Apr $3091.46 Bil $3060.65 Bil $3056.00 Bil ** Equity and bond neutral

Japan Monetary Base m/m Apr 2.3% 2.8% ** Equity and bond neutral

Monetary Base End of Period m/m Apr ¥529.2 Tril ¥509.8 Tril ** Equity and bond neutral

Tokyo Avg Office Vacancies m/m Apr 1.56 1.50 ** Equity and bond neutral

India Markit India PMI Composite m/m Apr 7.2 50.6 ** Equity bearish, bond bullish

Markit India PMI Services m/m Apr 5.4 49.3 ** Equity bearish, bond bullish

Australia AiG Performance of Services Index m/m Apr 27.1 38.7 ** Equity bearish, bond bullish

Trade Balance m/m Mar A$10.602 Bil A$4.361 Bil A$6.000 Bil ** Equity bullish, bond bearish

Foreign Reserves m/m Apr $63.2 Bil A$90.6 Bil ** Equity and bond neutral

Europe

Germany Industrial Production WDA y/y Mar -11.6% -1.2% -8.9% *** Equity bearish, bond bullish

Markit Germany Construction PMI m/m Apr 31.9 42.0 ** Equity bearish, bond bullish

France Private Sector Payrolls q/q 1Q -2.3% 0.5% -0.5% ** Equity bearish, bond bullish

Industrial Production m/m Mar -16.2% 0.9% -13.4% ** Equity bearish, bond bullish

Manufacturing Production m/m Mar -18.2% 0.9% -16.0% ** Equity bearish, bond bullish

Trade Balance m/m Mar -3343m -5224m -- ** Equity and bond neutral

Italy Retail Sales m/m Mar -21.3% 0.8% -15.0% ** Equity bearish, bond bullish

AMERICAS

Mexico CPI m/m Apr 2.2% 3.3% 2.1% *** Equity and bond neutral

Brazil Markit Brazil PMI Composite m/m Apr 26.5 37.5 ** Equity bearish, bond bullish

Markit Brazil PMI Services m/m Apr 27.4 34.5 ** Equity bearish, bond bullish

Financial Markets

The table below highlights some of the indicators that we follow on a daily basis. Again, the

color coding is similar to the foreign news description above. We will add a paragraph below if

a certain move merits further explanation.

Today Prior Change Trend

3-mo Libor yield (bps) 47 50 -3 Down

3-mo T-bill yield (bps) 10 11 -1 Neutral

TED spread (bps) 37 39 -2 Up

U.S. Libor/OIS spread (bps) 4 5 -1 Up

10-yr T-note (%) 0.70 0.70 0.00 Neutral

Euribor/OIS spread (bps) -27 -30 3 Neutral

EUR/USD 3-mo swap (bps) 8 6 2 Down

Currencies Direction

dollar UP Neutral

euro Flat Up

yen Down Up

pound UP Down

franc Down Up

Central Bank Action Current Prior Expected

Brazilian Selic Rate 3.000% 3.750% 3.250% On forecast

Commodity Markets

The commodity section below shows some of the commodity prices and their change from the

prior trading day, with commentary on the cause of the change highlighted in the last column.

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Price Prior Change Explanation

Brent $31.24 $29.72 5.11% Slowdown in Production

WTI $25.96 $23.99 8.21%

Natural Gas $1.96 $1.94 0.87%

Crack Spread $11.96 $12.36 -3.22%

12-mo strip crack $9.75 $9.85 -0.98%

Ethanol rack $1.23 $1.23 0.52%

Gold $1,693.94 $1,685.71 0.49%

Silver $14.99 $14.85 0.96%

Copper contract $237.55 $234.70 1.21%

Corn contract 317.25$ 314.25$ 0.95%

Wheat contract 525.00$ 517.50$ 1.45%

Soybeans contract 837.75$ 832.50$ 0.63%

Baltic Dry Freight 534 575 -41

Actual Expected Difference

Crude (mb) 4.6 8.0 -3.4

Gasoline (mb) -3.2 1.0 -4.2

Distillates (mb) 9.5 3.0 6.5

Refinery run rates (%) 0.90% 0.80% 0.10%

Natural gas (bcf) 111.0

Shipping

Energy Markets

Metals

Grains

DOE inventory report

Weather

The 6-10 and 8-14 day forecasts currently call for cooler temps for most of the country, with

warmer conditions in the Pacific and southwestern regions. Precipitation is expected for most of

the country.

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Asset Allocation Weekly

Confluence Investment Management offers various asset allocation products which are managed using

“top down,” or macro, analysis. We report asset allocation thoughts on a weekly basis, updating this section every Friday. Note that this report is also offered as a separate document on our website.

May 1, 2020

The policy response to COVID-19 has been mostly favorable for gold. Our gold model uses the

balance sheets of the Federal Reserve and the European Central Bank, the EUR/USD exchange

rate, and the real two-year T-note yield. The only variable that has been bearish for gold is the

dollar, but the massive rise in central bank balance sheets and the drop in real yields has lifted

the model’s fair value to 1,741.34.

0

400

800

1,200

1,600

2,000

00 02 04 06 08 10 12 14 16 18 20

GOLD SPOT MODEL FAIR VALUE

GOLD MODEL(Fed's Balance Sheet, ECB Balance Sheet, EUR/USD, real 2-yr)

Sources: Haver Analytics, CIM

Fair Value = $1741.34

GOLD MODEL(Fed's Balance Sheet, ECB Balance Sheet, EUR/USD, real 2-yr)

Sources: Haver Analytics, CIM

Fair Value = $1741.34

In the coming months, we expect the fair value to rise; both the ECB and the Federal Reserve are

likely to continue to expand their balance sheets, adding a broad spectrum of assets. We would

also expect some modest declines in the real two-year T-note yield as inflation rises. Weakening

the dollar may require direct action by the administration. Although this action may not occur

this year, we would not be shocked to see it occur at some point in the future.

In addition, there is a long-term relationship between gold prices and the level of the fiscal

deficit. Although the level of the current deficit does suggest that gold prices might be a bit

overvalued currently, the likelihood of expanding deficits should offer underlying support for

gold prices. The Congressional Budget Office recently increased its deficit forecasts; we still

view them as conservative and would anticipate even higher deficits due to falling tax receipts

and rising spending.

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-1,600

-1,200

-800

-400

0

400 0

400

800

1,200

1,600

2,000

1995 2000 2005 2010 2015 2020 2025

DEFICIT, CURRENT $, CBO

SPOT GOLD

GOLD AND THE DEFICIT

DE

FIC

IT (

$ B

N) $

PE

R O

UN

CE

Sources: Haver Analytics, CIM

GOLD AND THE DEFICIT

DE

FIC

IT (

$ B

N) $

PE

R O

UN

CE

Sources: Haver Analytics, CIM

Therefore, our short- and long-term outlooks for gold remain positive.

Past performance is no guarantee of future results. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice or a recommendation. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Opinions expressed are current as of the date shown and are subject to change.

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Data Section

U.S. Equity Markets – (as of 5/6/2020 close)

-60.0% -40.0% -20.0% 0.0% 20.0%

EnergyFinancials

IndustrialsReal Estate

MaterialsUtilities

S&P 500Consumer Discretionary

Consumer StaplesCommunication Services

HealthcareTechnology

YTD Total Return

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0%

Utilities

Energy

Financials

Real Estate

Materials

Industrials

Consumer Staples

Healthcare

S&P 500

Communication Services

Consumer Discretionary

Technology

Prior Trading Day Total Return

(Source: Bloomberg)

These S&P 500 and sector return charts are designed to provide the reader with an easy overview

of the year-to-date and prior trading day total return. Sectors are ranked by total return; green

indicating positive and red indicating negative return, along with the overall S&P 500 in black.

These charts represent the new sectors following the 2018 sector reconfiguration.

Asset Class Performance – (as of 5/6/2020 close)

-30.0% -20.0% -10.0% 0.0% 10.0% 20.0%

Small Cap

Commodities

Mid Cap

Foreign Developed ($)

Real Estate

Emerging Markets ($)

Foreign Developed (local currency)

Emerging Markets (local currency)

Large Cap

US High Yield

Cash

US Corporate Bond

US Government BondYTD Asset Class Total Return

Source: Bloomberg

Asset classes are defined as follows: Large Cap (S&P 500 Index), Mid Cap (S&P 400 Index),

Small Cap (Russell 2000 Index), Foreign Developed (MSCI EAFE (USD and local currency)

Index), Real Estate (FTSE NAREIT Index), Emerging Markets (MSCI Emerging Markets (USD

and local currency) Index), Cash (iShares Short Treasury Bond ETF), U.S. Corporate Bond

(iShares iBoxx $ Investment Grade Corporate Bond ETF), U.S. Government Bond (iShares 7-10

Year Treasury Bond ETF), U.S. High Yield (iShares iBoxx $ High Yield Corporate Bond ETF),

Commodities (Bloomberg total return Commodity Index).

This chart shows the year-to-date

returns for various asset classes,

updated daily. The asset classes are

ranked by total return (including

dividends), with green indicating

positive and red indicating negative

returns from the beginning of the

year, as of prior close.

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www.confluenceinvestment.com

15

P/E Update

May 7, 2020

0

5

10

15

20

25

30

70 80 90 00 10 20 30 40 50 60 70 80 90 00 10 20

4Q TRAILING P/E AVERAGE

-1 STANDARD DEVIATION +1 STANDARD DEVIATION

LONG-TERM TRAILING P/E

P/E

Sources: Robert Shiller, Haver Analytics, I/B/E/S, CIM

P/E as of 5/6/2020 = 21.5x

LONG-TERM TRAILING P/E

P/E

Sources: Robert Shiller, Haver Analytics, I/B/E/S, CIM

P/E as of 5/6/2020 = 21.5x

Based on our methodology,2 the current P/E is 21.5x, up 1.8x from last week. The rise in the P/E

was caused by the recovery in the S&P and rapidly falling earnings estimates, especially for Q2.

It is not unusual for the multiple to rise during recessions. Although earnings decline, investors

look past the current decline to an earnings recovery in the future and thus “buy now.” The

multiple will tend to decline as the economic recovery develops.

This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking

statements expressed are subject to change. This is not a solicitation or an offer to buy or sell any security.

2 This chart offers a running snapshot of the S&P 500 P/E in a long-term historical context. We are using a specific measurement process, similar to Value Line, which combines earnings estimates and actual data. We use an adjusted operating earnings number going back to 1870 (we adjust as-reported earnings to operating earnings through a regression process until 1988), and actual operating earnings after 1988. For the current quarter, we use the I/B/E/S estimates which are updated regularly throughout the quarter; currently, the four-quarter earnings sum includes two actual quarters (Q3 and Q4) and two estimates (Q1). We take the S&P average for the quarter and divide by the rolling four-quarter sum of earnings to calculate the P/E. This methodology isn’t perfect (it will tend to inflate the P/E on a trailing basis and deflate it on a forward basis), but it will also smooth the data and avoid P/E volatility caused by unusual market activity (through the average price process). Why this process? Given the constraints of the long-term data series, this is the best way to create a long-term dataset for P/E ratios.