Midterm Election and Market Outlook. How politics could impact policy and portfolios

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1 Midterm Election and Market Outlook How politics could impact policy and portfolios

2 Wilmington Trust does not support any candidate for office, nor does it advocate for any specific goal, nor does it take a position on any of the parties proposed policies. This presentation is intended to frame the wealth management issues and implications that may arise from the 2018 midterm elections. 2

3 Presenters and Agenda Midterm Election Outlook Market update & election scenarios: Distinguishing among what is probable, possible, and a pipe dream Tony Roth Chief Investment Officer Key policy initiatives for 2019 Meghan Shue Senior Investment Strategist Economic implications of the election Luke Tilley, Ph.D. Chief Economist Prospects for equity markets in 2019 and beyond Matt Glaser Head of Equity, Nontraditional Investments & Manager Research What do midterms mean for rates? Dominick D Eramo, CFA Head of Fixed Income 3

4 Section 1 Market update: volatility has returned

5 Volatility has returned 2018 has seen the return of more normal levels of volatility, following an abnormally quiet 2017 Volatility of S&P 500 by calendar year As of September 12, Represents standard deviation of daily returns, with 2018 annualized. Source: Bloomberg, Standard & Poor s 5

6 Equity volatility and performance Market volatility is typically much higher than in 2017, but does not doom overall performance S&P 500 intra-year declines vs. calendar year returns Data as of October 24, 2018 Source: Bloomberg, WTIA 6

7 Other crisis indicators not flashing red The VIX is elevated, but most traditional risk-off assets are stable Asset Signal Our interpretation Japanese yen Swiss franc Gold Treasury yields High-yield spreads The yen strengthened slightly versus the dollar in October, but has stabilized The swiss franc, another safe haven currency, has strengthened a bit, but is not signaling broad flight to quality Despite equity volatility, the price of gold has appreciated less than 5% from August lows An increase in Treasury yields spurred the initial weakness in markets, but yields have settled below those multi-year highs, not signaling a sustained risk-off environment High yield spreads have moved wider, but from extremely tight levels, and still far from levels reached in early 2016 LIBOR-OIS spread Spread is slightly wider in October, but below levels reached in early 2018 TED spread Spread is sitting near the tightest in several years Yield curve The yield curve slope has flattened slightly, but remains upward sloping As of October 25, Source: WTIA Significant financial market stress Moderate level of stress Little to no stress 7

8 Section 2 Election scenarios

9 Assessing the odds: Senate Polls strongly suggest the GOP will lose the House, but keep control of the Senate Forecasting the race for Senate As of October 29, Red shaded bars denote a Republican majority; blue shaded bars denote a Democratic majority. Source: 538.com. 9

10 Assessing the odds: House of Representatives Polls strongly suggest the GOP will lose the House, but keep control of the Senate Forecasting the race for House As of October 29, Red shaded bars denote a Republican majority; blue shaded bars denote a Democratic majority. Source: 538.com. 10

11 Midterm elections are not forgiving to the party in power Historically, the president s party has tended to lose seats in the House in a midterm election House seats gained/lost by president s party in their first midterm election Source: Strategas Research Partners. 11

12 Midterm elections are all about turnout A key determinant is the greater enthusiasm from the party that isn t in control Election turnout rates Republican midterm turnout advantage Left chart measures voting rate among registered voters. Sources: FiveThirtyEight.com, United States Elections Project, Vital Statistics of American Politics. 12

13 Section 3 Key policy initiatives

14 What midterms could mean for markets There are numerous macro- and sector-related implications of the elections Election outcome Potential policy implications Possible market reaction Red wall GOP defends majority in House Senate Gridlock Dems take control of House; GOP maintains majority in Senate Little chance of pullback of tax cuts, deregulation GOP to push for Tax Reform 2.0, indexing capital gains to inflation Healthcare reform Infrastructure package featuring public/private market collaboration Democratic control of key committees could lead to more investigations, stall legislation Increased risk of government shutdown, debt ceiling debate Possible areas of bipartisan support: China trade issues, increased regulation on tech, drug pricing, increase in defense spending, infrastructure Second leg higher for equities market Steeper yield curve Rotation into value Muted market reaction Higher volatility around key budget, debt deadlines Blue wave Dems take control of House and Senate Administration likely to be mired in investigations, giving little chance of meaningful policy change; elevated impeachment risks Possibility of large (up to $1 trillion) infrastructure bill, to be paid for in part through partial repeal of corporate tax cut and/or carbon tax Immigration bill Increase in minimum wage Expansion of the Supplemental Nutrition Assistance Program (SNAP) Higher volatility, but cycle continues to be driven by economics Interest rates to move lower, yield curve flatter on expectations for lower growth Support for growthstyle equities As of October 23, Represents the views of WTIA, all else equal. Source: WTIA. 14

15 Few precedents for market reaction to impeachment process Markets have generally been steered by other drivers outside of impeachment risks S&P 500 around Nixon s impeachment process and the 1974 recession (August 20, 1974 = 100) S&P 500 around Clinton s impeachment (December 19, 1998 = 100) Sources: U.S. Election Project, Moody s Analytics Data as of 1/2/ /31/1976. Sources: U.S. Election Project, Moody s Analytics Data as of 1/2/ /31/

16 U.S. China trade tensions could persist China s trade practices are one of a few bipartisan issues View of China s trade practices As of July 9, Source: Gallup. 16

17 Section 4 Economic implications of the election

18 Walking toward the cliff as discretionary spending trails off Under current law federal discretionary spending is slated to decline in 2020 and be a drag on overall economic growth Discretionary spending contribution to GDP growth Data as of June Source: Congressional Budget Office. 18

19 Federal debt held by the public projected to rise significantly Any effort to cut taxes further or boost spending after the election will run into the problem of an already-daunting long term debt outlook Gross federal debt held by the public as a percent of GDP Data as of June Source: CBO. 19

20 Section 5 Prospects for equity markets in 2019 and beyond

21 Tax boost to earnings set to fade in 2019 Fiscal stimulus will be less of a tailwind for stocks; estimates for revenue and earnings growth likely to decelerate, but remain solid into next year Revenue growth with consensus expectations EPS growth with consensus expectations. Sources: Standard & Poor s, Thomson Financial, FactSet, Credit Suisse. 21

22 Section 6 What do midterms mean for rates?

23 U.S. supply expected to support yields Reduction of the Fed s balance sheet coupled with higher U.S. debt financing needs should keep the long end of the yield curve elevated U.S. fixed income supply ($ trillion) Estimates as of May 31, Sources: Deutsche Bank; Jezek, Michal; Standard & Poor s; Zeng, Steven. 23

24 Section 7 Our positioning

25 Positioning in response to our outlook (High-Net-Worth investors) A big-picture glimpse of our overall positions, as of October 1, 2018 Based on current Growth & Income Strategy for High-Net- Worth with Hedge Funds, this chart represents current weights relative to our strategic asset allocations, with high and low boundaries reflecting our maximum and minimum weightings. This material is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. There is no assurance that any investment strategy will be successful. Investing involves risks and you may incur a profit or a loss. Source: WTIA. 25

26 Positioning in response to our outlook (Institutional investors) A big-picture glimpse of our overall positions, as of October 1, 2018 Based on current Growth & Income Strategy for Institutional with Hedge Funds, this chart represents current weights relative to our strategic asset allocations, with high and low boundaries reflecting our maximum and minimum weightings. This material is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. There is no assurance that any investment strategy will be successful. Investing involves risks and you may incur a profit or a loss. Source: WTIA. 26

27 Our Wilmington Trust Sector Allocation Strategy Equity sector allocations Favor: Technology Financials Industrials Energy Do not favor: Staples Utilities We are overweight more cyclically exposed sectors and underweight defensive sectors as we continue to expect steady growth in the economy. Allocations as of September 30, As of September 30, 2018 the Global Industry Classification Standard (GICS ) reclassified some sectors. Specifically, the Telecommunication Services sector will be expanded to include select companies from Consumer Discretionary and Information Technology sectors and renamed Communication Services. In addition, online marketplaces for consumer products and services will be moved from the Information Technology sector to the Consumer Discretionary sector. This material is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. There is no assurance that any investment strategy will be successful. Investing involves risks and you may incur a profit or a loss. 27

28 Disclosures Advisory Service Providers Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and nonfiduciary services, including trustee, custodial, agency, investment management and other services. International corporate and institutional services are offered through Wilmington Trust Corporation's international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Investment products are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by Wilmington Trust, M&T, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain qualified investors that is, investors who meet certain income and/or investable assets thresholds. Any offer will be made only in connection with the delivery of the appropriate offering documents, which are available to prequalified persons upon request. Wilmington Trust Investment Advisors, Inc., a subsidiary of M&T Bank, is a SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T affiliates and clients. Brokerage services are offered by M&T Securities, Inc., a registered broker/dealer, wholly owned subsidiary of M&T Bank, and member of the FINRA and SIPC. Wilmington Funds are entities separate and apart from Wilmington Trust, M&T Bank, and M&T Securities. Suitability This material is provided for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a recommendation or determination by Wilmington Trust that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. This material is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional should be sought. The opinions, estimates, and projections presented herein constitute the informed judgments of Wilmington Trust and are subject to change without notice. Expected return information in this presentation is derived from forecasting. Forecasts are subject to a number of assumptions regarding future returns, volatility, and the interrelationship (correlation) of asset classes. Actual events or results may differ from underlying estimates or assumptions, which are subject to various risks and uncertainties. No assurance can be given as to actual future market results or the results of Wilmington Trust s investment products and strategies. The information in this presentation has been obtained or derived from sources believed to be reliable, but no representation is made as to its accuracy or completeness Wilmington Trust Corporation and its affiliates. All rights reserved. 28

29 Disclosures Continued An Overview of Our Asset Allocation Strategies Wilmington Trust offers seven asset allocation models for taxable (high-net-worth) and tax-exempt (institutional) investors across five strategies reflecting a range of investment objectives and risk tolerances: Aggressive, Growth, Growth & Income, Income & Growth, and Conservative. The seven models are High Net Worth (HNW), HNW with Liquid Alternatives, HNW with Private Markets, HNW Tax Advantaged, Institutional, Institutional with Hedge LP, and Institutional with Private Markets. As the names imply, the strategies vary with the type and degree of exposure to hedge strategies and private market exposure, as well as with the focus on taxable or tax-exempt income. On a quarterly basis we publish the results of all of these strategy models versus benchmarks representing strategic implementation without tactical tilts. Model Strategies may include exposure to the following asset classes: U.S. large-capitalization stocks, U.S. small-cap stocks, developed international stocks, emerging market stocks, U.S. and international real asset securities (including inflation-linked bonds and commodity-related and real estate-related securities), U.S. and international investment-grade bonds (corporate for Institutional or Tax Advantaged, municipal for other HNW), U.S. and international speculative grade (high-yield) corporate bonds and floating-rate notes, emerging markets debt, and cash equivalents. Model Strategies employing nontraditional hedge and private market investments will, naturally, carry those exposures as well. Each asset class carries a distinct set of risks, which should be reviewed and understood prior to investing. investment grade (also high yield or speculative ). Similarly, Standard & Poor s ratings range from AAA to D. Bonds rated BBB and better are considered investment grade and bonds rated BB+ and below are below investment grade. Investing involves risks and you may incur a profit or a loss. Diversification cannot ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. Risk Assumptions All investments carry some degree of risk. The volatility, or uncertainty, of future returns is a key concept of investment risk. Standard deviation is a measure of volatility and represents the variability of individual returns around the mean, or average annual, return. A higher standard deviation indicates more return volatility. This measure serves as a collective, quantitative estimate of risks present in an asset class or investment (e.g., liquidity, credit, and default risks). Certain types of risk may be underrepresented by this measure. Investors should develop a thorough understanding of the risks of any investment prior to committing funds. Quality Ratings Quality ratings are used to evaluate the likelihood of default by a bond issuer. Independent rating agencies, such as Standard & Poor s and Moody s Investors Service, analyze the financial strength of each bond s issuer. Moody s ratings range from Aaa (highest quality) to C (lowest quality). Bonds rated Baa3 and better are considered investment grade. Bonds rated Ba1 and below are below 2018 Wilmington Trust Corporation and its affiliates. All rights reserved. 29

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