STEP Cayman September 2020 Ian B. ZinnPrincipal, Wealth Advisor - - PowerPoint PPT Presentation

STEP Cayman

September 2020

Ian B. Zinn—Principal, Wealth Advisor Moira A. McLachlan, CFA—Senior Investment Strategist

This presentation is provided by Bernstein. This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment- advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting. Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

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The number of research analyst reference relates to all analysts working at AllianceBernstein L.P. affiliated subsidiary companies. Please note, Bernstein Research does not provide investment management services to Bernstein Private Wealth Management clients As of May 31, 2020 Source: AB

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3

Stocks Snapped Back From First Quarter Sell-off

As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Lines represent all global equity drawdowns greater than 5% since 1965. Global Equities as represented by the MSCI World Index (USD). Source: Bloomberg and AB

The Rally

2020 All other 5%+ declines since 1965

Risk Assets Bounced Following Historic Sell-Off

0.5 0.6 0.7 0.8 0.9 1.0 1.1 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 241 251 261 271 281 291 301 MSCI World Cumulative Drawdown Days From Start of Drawdown

4

Sticking To One’s Long-Term Allocation Proved Beneficial

As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. *Moderate allocation is 60% global equities and 40% municipal bonds. Global equities represented by the MSCI ACWI and municipal bonds by the Bloomberg Barclays 1-10 Year Index. Allocation interrupted represents an allocation change to 100% cash, represented by ICE BofA 3-Month Treasury Bill Index, on the date that the US declared a national emergency—March 13, 2020. Source: Bloomberg-Barclays, EPFR, Bloomberg, MSCI, and AB

$0.98 $0.88 $0.75 $0.80 $0.85 $0.90 $0.95 $1.00 $1.05 12/31/19 1/20/20 2/9/20 2/29/20 3/20/20 4/9/20 4/29/20 5/19/20 6/8/20 6/28/20 Value of $1 Invested December 31, 2019

COVID-19 Event Timeline (YTD 2020) Moderate Allocation Growth of $1*

60/40

60/40, then Cash

Italian cases surge POTUS Oval Office address US blocks European visitors US declares national emergency Federal Reserve cuts rates to zero NYC and California schools close US stimulus bill signed Vaccine trial planning announced Oxford scientists announce first proven treatment (Dexamethasone) SXSW cancelled Hubei locks down

The Rally

NY cases peak

In the two weeks s betw tween n the US decla clari ring ng a nationa nal emerg mergency ncy and d Congre ngress s signi ning ng the CARES S Act, t, $330B 0B move ved d into mone ney marke rkets. ts. (No Note te: During ng the first t two weeks ks of Februa bruary, ry, that t figure ure was s $13B. B.)

5

Four Key Catalysts Sparked The Market Rally

Top left and top right charts as of April 30, 2020. Bottom left chart as of June 30, 2020. Bottom right chart as of June 25, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: Bloomberg, Congressional Budget Office, Peter G. Peterson Foundation, Wall Street Journal, JHU, company disclosures, and Bernstein Analysis

Fiscal Stimulus Amount (USD Billions) Fed Funds Target Rate (Percent)

1,000 2,000 3,000 50 100 150 200 250 300 350 400 450 500 550 600 Days Since Start of Crisis 1 2 3 4 5 6 50 100 150 200 250 300 350 400 450 500 550 600 Days Since Start of Crisis

Coronavirus Global Financial Crisis Coronavirus Global Financial Crisis

100 1000 10000 100000 1000000 1 11 21 31 41 51 61 71 81 91 101 111 Number of Confirmed Cases Days Since Cases Exceeded 100

COVID-19 Cases >100 (All US States)

The Reasons

Vaccine Timeline

Co Comp mpany Ph Phase 1 Interm Da Data Ph Phase 2/3 /3 Ap Approval AZN / Vaccitech / Oxford April June Late Summer TBA CanSino March May 22 TBA TBA JNJ / Emergent September 2H20 N/A Early 2021 Moderna March May 18 July 4Q20 Pfizer / BioNTech May June/July TBA TBA Sanofi / Translate Bio 4Q20 Early 2021 TBA TBA CureVac Early Summer 3Q20 TBA TBA Inovio April Late June July/August YE2020 Sanofi / GSK 2H20 Early 2021 TBA TBA

6

1000 2000 3000 4000 5000 6000 6/19 7/19 8/19 9/19 10/1911/19 12/19 1/20 2/20 3/20 4/20 5/20 Number of Players

Las Vegas Casino Traffic

CZR GDEN LVS MGM PENN Private WYNN

Economy Opening Up, But Progress Will Be Bumpy and Uneven

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3/20 4/20 5/20 6/20

Total TSA Travel Numbers

Total Traveler Throughput

Top left chart as of June 27, 2020. Top right chart as of June 30, 2020. Bottom left chart as of June 26, 2020. Bottom right chart as of June 28, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Casino traffic represents casino players, which is distinct from foot traffic and includes table and slots machine users. Source: MScience, US Transportation Security Administration, Metropolitan Transportation Authority, Bloomberg, and AB

10 20 30 40 50 6/19 7/19 8/19 9/19 10/1911/1912/19 1/20 2/20 3/20 4/20 5/20 Weekly Entries (Millions)

NYC Subway Use

MTA Turnstile Entries Total

The Risks

(30) % 0 % 30 % 60 % 90 % 6/19 11/19 4/20

Credit Card Spending YoY Change (Weekly Average)

Grocers Restaurants

7

Market Implications

• f US Election

I Know “It’s Different This Time” But…

Past performance does not guarantee future results. Returns reflect annualized returns for each Presidential Term dating back to 1937, based off the Dow Jones Industrial Average. As of December 31, 2019 Source: Bloomberg and AB

…There’s Little Relationship Between Political Power and the Stock Market

Democratic President Republican President

9.2% 9.1%

Divided Government Unified Government

10.0% 8.2%

9

How Can We Think About the Potential Market Impact?

What We Know What We Don’t Know

• The balance of power in the White House, Senate,

and House will affect the economy and markets

• What current polls are saying
• We shouldn’t let personal political views cloud our

investment judgment

• How closely the election results will match the polls
• How actual policy proposals will compare to

campaign platforms and how much they’ll change as they’re debated and voted on

• How much different election results or policies are

already being factored in by the market or when they will be On balan ance, w we do not r recommen end t tactical as asset a allocation s shifts d driven b by e elec ection h han andi dicap apping Our investment teams are working every day to make sure we’re taking advantage of market mispricings while minimizing the downside risk to the portfolio from any individual event

10

Markets Tend to Ignore Politics Until a Month Before the Election

Historical analysis does not guarantee future results. Polling spread is the absolute difference in polling percentage between the two major presidential candidates. Source: Bernstein US Economics Research

In Recent Elections, the Correlation Between Stocks and Poll Results Is Minimal Until October; Then They Become More Closely Linked

8 31 Jan–Sep

• Oct. to

Election Ave Average 1996 1996–2016 016 7 25 Jan–Sep

• Oct. to

Election 2016 3 52 Jan–Sep

• Oct. to

Election 2012 24 61 Jan–Sep

• Oct. to

Election 2008 Real eally ab about Glo lobal F Fin inancial C l Cris isis is 4 24 Jan–Sep

• Oct. to

Election 2004 1 19 Jan–Sep

• Oct. to

Election 1996 8 2 Jan–Sep

• Oct. to

Election 2000 Real eally ab about en end of dot-com b bubble Correlation Between Polling Spread and Stock Price Changes

11

The Market Currently Expects Unusually High Volatility in November…

Historical analysis does not guarantee future results. Price moves based on implied and realized volatilities of the S&P 500. Source: Bernstein US Options Trading Desk

…which may be a function of anticipated uncertainty around when the election result will be known

• A large portion of votes are likely to be

submitted by mail

– Counting and validating votes may take longer – Primary election results have been delayed by weeks in SOME races

• Political polarization may amplify the

uncertainty

1 2 3 4 5 6 Implied November 2020 Move November 2012 & 2016 Average Move Past 30 Day Realized Implied Daily Price Changes

12

How Might the Election Affect Fiscal and Monetary Policy?

As of August 4, 2020 Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Assumes Democrats retain control of the House of Representatives. Figures may not tally to 100% due to rounding and transaction costs. Source: Election probabilities are RealClearPolitics’ average of the odds of 7 betting markets, AB

Investors are currently expecting:

• Multi-year fiscal stimulus
• Easy monetary policy

These four election scenarios will have varying implications for investors’ confidence in this continued policy support

Republican White House Republican Senate Fiscal: Expansionary Fed: Potential shift in Chair Democratic White House Democratic Senate Fiscal: Expansionary, but with corporate tax hikes Fed: Easy policy Democratic White House Republican Senate Fiscal: Rediscovered austerity Fed: Easy policy Republican White House Democratic Senate Fiscal: Stagnation Fed: Easy policy

Trump Reelection Probability: 37% Biden Election Probability: 61%

13

Competing Visions for the Future

Source: Campaign websites, press reports, and AB

Campaign Platforms Are Informative, But Actual Policies Are What Matter

Biden Platform Trump Platform Taxes

• Partial reversal of corporate tax cuts, raising rates from

21% to 28%, and implementing minimum federal tax

• Increase marginal tax rate on highest earners from 37%

to 39.6%

• Tax capital gains as ordinary income for $1M+ earners
• Pre-COVID proposal to extend individual tax cuts beyond

2025

• COVID stimulus proposal to cut payroll tax that funds Social

Security and Medicare from 15.3% to zero

Trade

• Reduction in tariffs
• Multilateral trade agreements
• Push China on IP infringement and steel dumping
• Onshore more pharma and electric vehicle

manufacturing

• Use tariffs aggressively
• Bilateral trade agreements
• Potential unspecified Phase Two agreement with China
• Onshore supply chains

Healthcare

• Expand the ACA for low-income population
• Create a public option
• Lower Medicare age to 60 from 65
• Allow Medicare to negotiate lower prices and use caps,

indexing, and legalization of foreign purchasing to limit prices

• Repeal ACA in full or in pieces
• Work requirements and caps or block grants on Medicaid
• Drug pricing inside Medicare to be based on global prices

Infrastructure

• $2 trillion infrastructure plan with emphasis on public

transportation, electric vehicles, and clean energy technologies

• Loosely specified plans with emphasis on rural areas

14

What Might the Election Mean for Asset Class Fundamentals?

Analysis provided for illustrative purposes only and is subject to revision. Source: AB analysis

Stock and Bond Returns Depend Not Only on Fundamentals but Also Current Expectations

Blue Wave Biden + GOP Senate Trump + Dem Senate Red Wave US Stocks Neutral Higher corporate taxes potentially offset by reduced trade tensions and stimulus spending, including infrastructure plan Negative Gridlock could make stimulus spending and infrastructure plan difficult, also harder to pass tax hikes Neutral Likely to find some agreement on stimulus,

• ther policies may face

gridlock, would expect trade tensions to remain elevated Positive Potentially higher volatility from trade

• tensions. Corporate tax

hikes off the table, stimulus likely and eventual infrastructure plan possible US Bonds Rate tes: Neutral Infla latio ion: Slightly higher Credi dit: Headwind Muni unis: Tailwind Rate tes: Lower Infla latio ion: Lower Credi dit: Headwind Muni unis: Headwind Rate tes: Neutral Infla latio ion: Slightly higher Credi dit: Neutral Muni unis: Neutral Rate tes: Slightly lower Infla latio ion: Higher Credi dit: Tailwind Muni unis: Headwind

15

Asset Allocation Based on a Plan Beats Asset Allocation Based on Polls

Past performance does not guarantee future results. Through September 30, 2019 Monthly performance of Dow Jones Industrial Average, dating back to 1937 Source: Bloomberg and AB

Market Timing Based on Politics Hurts Returns

Growth of US$10,000: Dow Jones Industrial Average 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 37 46 55 64 73 82 91 00 09 18 US Dollar Fully Invested at All Times Invested Only During a Democratic Presidency Invested Only During a Republican Presidency

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Blue Wave Biden + GOP Senate Trump + Dem Senate Red Wave Constructio ion a and Engineering Transportatio ion Renew ewab ables es US O Oil & & Gas Heal alth I Insurer ers Pharma ma Big T Tech ch

The Election May Drive Future Sector Fundamentals

Historical analysis does not guarantee future results. Source: AB analysis

Whose Profits May Rise or Fall?

17

The Election May Have Meaningful Implications for Wealth Planning

Bernstein does not provide tax, legal, or accounting advice. Source: AB analysis

Planning for Potentially Higher Tax Rates Is More Likely to Add Value than Tactical Trading

• Tax Management

– Loss harvesting could defer taxes into a higher rate environment – Gain harvesting could reduce future taxes, but only h helps i if r rat ates es increa ease

• Asset Allocation

– Tax-efficient assets and strategies benefit

• Retirement accounts and cash balance plans
• Municipal bonds
• Insurance and annuities (including Private Placement Life Insurance and Private Placement Variable Annuities)
• Private equity and alternative strategies with long holding periods
• Passive management
• Charitable Giving

– Use appreciated positions

• Estate Taxes

– Another area of potential policy changes, but specifics unknown

18

Geopolitical Events Only Rarely Have a Lasting Market Impact

As of June 30, 2020. Past performance does not guarantee future results. There is no guarantee that any estimates or forecasts will be realized. *Denotes the geopolitical event occurred during a recession or six months prior to the start of a recession **Date that China officially notified the WHO of the outbreak

Source: FactSet, National Bureau of Economic Research, World Heath Organization, S&P, and AB

Select Geopolitical Events Since 1970 and S&P 500 Returns (%)

Event First Trading Day 1 Week 1 Month 1 Quarter 1 Year SARS** 2/11/2003 (0.1) (3.2) 12.2 39.5 Second Gulf War 3/20/2003 (0.5) 2.4 14.3 29.2 Madrid Train Bombings 3/11/2004 0.0 1.5 1.5 9.5 Orange Revolution–Ukraine 11/22/2004 1.1 2.2 3.1 8.6 Asian Tsunami 12/27/2004 0.3 (3.4) (2.7) 6.8 London Bombings 7/7/2005 2.4 2.7 0.2 8.6 Hurricane Katrina 8/29/2005 1.1 1.0 5.7 9.5 Arab Spring 12/17/2010 1.2 4.2 1.6 0.2 Hurricane Sandy 10/29/2012 1.1 (0.0) 7.0 27.3 Boston Marathon Bombing 4/15/2013 (2.1) 3.0 6.3 16.7 Russia/Ukraine/Crimea 2/27/2014 1.6 0.5 3.5 16.8 Greek Referendum 11/5/2015 (1.2) (0.3) (8.4) 1.4 Brexit 6/24/2016 (0.7) 3.1 3.0 17.8 Trump Surprise Election Win 11/8/2016 1.6 5.4 8.1 24.0 Hurricane Harvey/Irma/Maria 8/25/2017 1.4 2.8 7.2 20.2 US-China Trade War*** 1/22/2018 2.2 (2.6) (3.7) (3.1) Coronavirus Outbreak 2/19/2020 (7.1) (28.7) (11.9) N/A

Key Takeaway: Stocks have generally shrugged off geopolitical events, since they rarely have a lasting impact on the business cycle.

Event First Trading Day 1 Week 1 Month 1 Quarter 1 Year Watergate 6/19/1972 (0.1) (1.4) 0.4 (3.0) Yom Kippur War* 10/8/1973 1.4 (3.9) (10.0) (43.2) Three Mile Island Accident 3/28/1979 (0.1) (0.7) (0.2) (4.2) Iran Hostage Crisis* 11/5/1979 (1.0) 3.6 12.3 24.3 Reagan Assassination Attempt* 3/30/1981 0.6 0.6 (1.6) (16.9) Challenger Space Shuttle 1/28/1986 3.2 9.3 16.8 32.0 Iran-Contra Affair 11/3/1986 0.7 2.1 12.3 3.2 Iraq Invades Kuwait* 8/2/1990 (4.7) (8.9) (12.8) 12.8 Desert Storm/First Gulf War* 1/17/1991 4.5 17.2 23.6 36.6 LA Riots 4/29/1992 2.0 2.3 2.8 10.2 WTC Bombing (1993) 2/26/1993 1.2 2.1 2.2 8.3 Oklahoma City Bombing 4/19/1995 1.4 3.1 11.3 30.5 Centennial Park Olympic Bombing 7/29/1996 4.3 4.6 10.8 50.6 Kenya/Tanzania Embassy Bombings 8/7/1998 (1.3) (10.5) 5.1 21.0 USS Cole Bombing* 10/12/2000 (1.6) 0.2 (2.5) (18.5) Bush-Gore Hanging Chad* 11/7/2000 (5.6) (5.5) (5.3) (20.9) 9/11* 9/17/2001 (4.9) (0.9) 4.7 (15.5) War in Afghanistan* 10/8/2001 1.9 3.0 9.8 (24.2) Summary 1 Week 1 Month 1 Quarter 1 Year Average 0.1 0.2 3.6 9.3 % of Events Negative 40 37 29 29 Conflict/War Avg. 0.7 1.7 4.7 4.7 Terrorism Avg. (0.1) 0.7 4.4 12.4 Political Avg. (0.2) 1.1 2.4 5.3 Environmental Avg. 0.8 (0.1) 3.4 11.9 Social Avg. (0.3) (3.9) 3.7 16.2

19

COVID as a Catalyst

The End of the Era of Good Macro?

As of March 31, 2020 Source: Haver Analytics and AB

Congress and the Fed Are Substantially Increasing the Debt and Money Supply

Debt to GDP is Expected to Reach Post-WWII Highs Percent The Fed’s Assets Have Risen Sharply USD Trillions 20 40 60 80 100 120 1 2 3 4 5 6 7 8 1994 1999 2004 2009 2014 2019

21

The End of the Era of Good Macro?

As of March 31, 2020 Source: Haver Analytics and AB

The Debt Was Low in the Inflationary 1970s Percent The Velocity of Money Has Fallen for Decades GDP/M2

20 30 40 50 60 70 80 90 2 4 6 8 10 12 14 1960 1967 1974 1981 1988 1995 2002 2009 2016 Core CPI Inflation (Left Scale) Debt-to-GDP (Right Scale) 0.5 1.0 1.5 2.0 2.5 1960 1967 1975 1982 1990 1997 2005 2012 2020 US Euro Area Japan Switzerland UK Canada

Deficits, Debt, and Inflation Are Less Connected than You May Think

22

The Social Safety Net and Inequality Have Risen to the Forefront

Source: Bureau of Labor Statistics and AB

Unemployment Rate Percent Ability to Work From Home by Demographic Percent

These Issues Are Likely to Drive Politics and Policy in the Coming Years

2 4 6 8 10 12 14 16 1948 1952 1956 1961 1965 1969 1974 1978 1982 1987 1991 1995 2000 2004 2008 2013 2017 20 40 60 80

Earnings <25th percentile Earnings 25th-50th percentile Earnings 50th-75 percentile Earnings >75th percentile Less than high school High school, no college Some college or associates degree Bachelor's degree and up Hispanic Black White Asian 23

Three major areas to watch:

• Supply chains
• Fragility
• National security
• Capital allocation
• Debt
• Buybacks/Dividends
• M&A
• Automation
• General tailwind
• Post-recession effect

Will Efficiency Fall by the Wayside in a Riskier World?

Historical cash flows of S&P 500 constituents on June 24, 2020 Source: FactSet and AB

Uses of Cash by S&P 500 Companies, 2010 USD Trillions 0.5 1 1.5 2 2.5 3 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

USD Trillions

R&D Capex Cash Acquisitions Buybacks Dividends

24

We’ve accelerated years of technological change into a matter of months

• Telehealth
• Videoconferencing
• Online education
• E-commerce
• Food aggregation and delivery

A Tailwind for Technological Adoption

25

Ian B. Zinn ian.zinn@bernstein.com