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3751580-4905600Investment CommentarySecond Quarter – 2020CoronavirusBy Neil McPeak, Jr.287083546281000In the first three months of 2020, we saw the fastest 30% decline in the S&P 500 ever. In 22 days, the market crashed 30%. This decline was faster than The Great Depression in 1934 and the financial crisis in 2008. Growing concern over the spread and severity of the Coronavirus (COVID-19) caused panic in the market. Coupled with selling in automated trading platforms, margin calls, and unwinding of leverage, the market declined dramatically.As worry of a widespread pandemic, similar to the Spanish Flu of 1918, took hold, many investors decided to sell and sit on the sidelines. Money market fund flows hit a new record, with $148 billion flowing into money market funds in one week.In the financial world, there is a term called “tail risk” – the probability of an unlikely event happening. 99.7% of the time, or three standard deviations from normal, these “tail risk” type of events will not happen. This is how the world viewed a global pandemic – extremely unlikely. However, as the virus started to spread across Europe and then the first cases were discovered in the US, that extremely unlikely event became probable and then evident.“Four Things Must Happen for Economic, Market Recovery”On March 31st, Jeremy Siegel, WisdomTree’s Senior Investment Strategy Advisor, outlined the four things that must happen for the world and markets to recover from the Coronavirus crisis. They are:Fiscal and monetary supportFlattening the curveArrival of vaccines and therapeuticsImplementation of widespread testing measuresThe Federal Reserve and the government completed the first step by dropping interest rates to zero enacting the Coronavirus Aid, Relief and Economic Security (CARES) Act. The actions by the Federal Reserve and the Government were swift and substantial, with the more than $2 trillion or 10% of total US GDP being pumped back into the US economy. The Federal Reserve and the government have demonstrated a “whatever it takes” stance to fighting the virus and supporting the economy. We are just starting to see step two materialize. Social distancing has been effective at slowing the spread of the virus and flattening the curve. The case count in Italy, Spain and New York City are starting to slow, albeit in fits and starts. We believe this is a very positive development that the hospital system will not be overrun as long as people practice social distancing.The third step is the arrival of vaccines and therapeutics. The best estimation of when a vaccine will become available is early 2021. This means that we will go through the summer and potentially start a new cold and flu season without a vaccine. Jeremy Siegel called this a “sobering fact,” as we will have to deal with social distancing for some time. iiiSiegel continued by saying: “We cannot wait a year to open up the economy. The market will tolerate a two- to three-month shutdown, it will not tolerate a six- to nine-month shutdown.” As such, the focus now becomes how and when we can open back up the economy.This leads to Siegel’s point number four: implementation of widespread testing measures, as we learn more about the virus, who has it, and who can go back to work. The entire world will be constantly tested for the virus. In China, Alibaba created a tracking app that gives each citizen a green, orange or red QR code based on their past locations proximity to people who are infected. Walking into your local café in China, you need to show a green QR code, indicating that you have not been near an infected person.While this type of tracking may not be feasible or wanted in the US, we believe that measures like the ones taken in China will have to be implemented before getting back to normal.And This, Too, Shall PassWhile the gyrations in the market have been unprecedented and nerve-racking, we are reminded that this, too, shall pass. It is not about trying to predict the future, but managing your current environment and making the proper decisions.Below are five things that we have been discussing with clients. Be Safe – The health and safety of you and your family is the most important thing right now. Without this, finances don’t matter. This also means your mental health. If you find yourself nervous or upset about the market fluctuation, it may be best to take another look at your portfolio. Feeling more confident is extraordinarily important at this time.Cash for Emergencies – We are recommending that clients keep a minimum of six months’ worth of expenses in cash in case of emergencies. However, many clients prefer to have more. It is important to decide on a number that you feel comfortable.Check your Income Sources – An important part of your investment plan are your income sources. Check to make sure that they are still solid. Most likely they are in a good position. Social Security and pension checks are still being paid, income from annuities are still guaranteed by insurance companies, and the highest quality dividend paying stocks are still increasing their income. Focus on Quality – It is important to review your accounts and focus on quality investments. Upon review, if there is an investment that you don’t like or you feel is lower quality and will not add value, now is a good time to clean up your accounts. There are still a number of high quality investments trading at a discount to buy.Invest for the Long Run – Any time the market declines 30%, it is a good time to look at investing for the long run. The market will be volatile going forward, however if your focus is on long term investing, then you will be rewarded.Alpha – Balanced Portfolio ChangesIn our Alpha – Balanced portfolio we made one change. We reduced our international exposure by selling Vanguard Emerging Market (VWO) and purchasing SPDR Gold Trust (GLD).We believe that emerging market economies, such as India and Brazil, could have a harder time containing the virus than the US. In addition, trust in China is declining. Given that the outbreak originated in China and that global trade is expected to slow, we feel that it is better to invest in the United States. The emerging markets index still holds a significant allocation to Chinese companies.In times of crisis, and specifically when the Federal Reserve’s balance sheet is increasing, gold has historically performed well. In the years after the last recession, the Federal Reserve’s balance sheet grew from $1 trillion in 2008 to $3 trillion in 2012. During that time, gold prices went from roughly $800 per ounce to a peak of nearly $1,900 per ounce in 2011. We see the same trend continuing now. The Federal Reserve’s balance sheet is increasing rapidly as they buy bonds and begin implementing their fiscal stimulus program.Diversified Stock Income Plan (DSIP) Portfolio ChangesIn the DSIP portfolio, we continue to focus on quality. In the past three months we sold TJ Maxx (TJX), Polaris (PII), and Sysco Foods (SYY) and are buying Church & Dwight (CHD), Lockheed Martin Corp (LMT), Sherwin-Williams (SHW), and Union Pacific (UNP).TJ Maxx is an excellent company with loyal following. However, the company recently announced that they will be eliminating their dividend and will use that money while their stores are closed throughout the country. This seems like a prudent move. However, the criteria to be part of DSIP is that the company has to pay and increase their dividend each year. Since they are eliminating the dividend, the position was sold.Polaris is the leading ATV and snowmobile manufacturer. They are a well-run company with a history of increasing their dividend. However, the DSIP team believes that the current economic environment will be a headwind to Polaris’ sales and that any rebound in demand after social distancing may be muted by prolonged economic weakness.Sysco is the largest North American distributor of food and related products. However, with social distancing and the elimination of large events, Sysco’s business has been significantly impacted. In recent years, Sysco has been borrowing more money to continue operations. Given the impact of social distancing, there is a high likelihood that they will cut or eliminate their dividend.Church & Dwight is a small manufacturer of household products, such as Arm & Hammer and Waterpik. They are a healthy company with a solid balance sheet. They have raised their dividend 8% per year over the past five years.Lockheed Martin is one of the world’s largest aerospace and defense companies with notable products such as F-35 and Black Hawk helicopters. Lockheed’s dividend payout ratio is roughly 40% and they have increased their dividend an average of 10% per year over the past five years.Sherwin-Williams is the world’s largest paint and coating company. Given the strong brand name and high free cash flow, the company is uniquely positioned to ride out social distancing and economic slowdown. The company has raised its dividend an average of 8% per year.Union Pacific operates one of the North America’s largest railroad networks. They have a strong balance sheet (A- by Standard and Poor’s) and strong free cash flow. They have a moderate dividend payout ratio of 44% and have raised their dividend 8% per year over time. Index Returns: US Large Cap Equity: S&P 500 Index; US Small Cap Equity: Russell 2000; Non-US Developed Equity: MSCI EAFE; Emerging Markets Equity: MSCI EM Emerging Mkts; Commodity: Bloomberg Commodity Index; Investment Grade Taxable Bonds: Barclays US Aggregate Bond; Investment grade Tax Exempt Bonds: Barclays Muni Bond; High-Yield Bonds: BofA ML High Yield Master IIAs PIM portfolios are separately managed, the individual client account holdings will vary, perhaps significantly, from those listed on this factsheet. A client opening an account today may, or may not, be invested in securities. For the most recent portfolio composition please contact the PIM Manager. Please see your Wells Fargo Advisors Client Statement for your most current holdings. The minimum account size for this program is $50,000.The Private Investment Management program is not designed for excessively traded or inactive accounts, and may not be suitable for all investors. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services.S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.?Investments and investment strategies contained are provided for informational purposes only. We would need to review your individual situation before recommending appropriate strategies to you. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity.Dividends are not guaranteed and are subject to change or elimination. While stocks generally have a greater potential return than government bonds and treasury bills, they involve a higher degree of risk. Government bonds and treasury bills, unlike stocks, are guaranteed as to payment of principal and interest by the US Government if held to maturity.The Diversified Stock Income Plan (DSIP List) focuses on companies that Wells Fargo Advisors Advice & Research believes will provide consistent annual dividend growth over a long-term investment horizon. The Advice & Research team’s objective is to provide a broad list of high quality, industry leading companies from which an investor can assemble a well-diversified portfolio. Through consistent dividend growth, the Advice & Research team’s goal is to help investors stay ahead of the wealth eroding effects of inflation. Of course dividends are not guaranteed and are subject to change or elimination.The opinions expresses here reflect the judgment of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believes to be reliable, but its accuracy and completeness are not guaranteed.Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and separate non-bank affiliate of Wells Fargo and Company.0420-01632 ................
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