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20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
www.confluenceinvestment.com
1
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
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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2
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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3
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.
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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4
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.
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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5
• 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
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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6
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.”
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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7
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.
20 Allen Avenue, Suite 300 | Saint Louis, MO 63119 | 314.743.5090
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8
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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9
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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13
-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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14
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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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.