BOK Financial : Economic & Market Outlook October 2020

Q4 2020 ECONOMIC & MARKET OUTLOOK

October 7, 2020

Webex Meeting

J. Brian Henderson, CFA

EVP, Chief Investment Officer

Carrie Clasen Porter

SVP, Director of Strategic Initiatives - Investment Management

Matt Stephani, CFA

President, Cavanal Hill - Investment Management

1

THE RACE TO GET AMERICA BACK TO WORK

• The pace of recovery in the labor market has exceeded expectations.
• The rehiring of temporarily laid off workers has driven the robust recovery.
• A prolonged virus impact risks more permanently unemployed.

	20,000					16%
	18,000					14%
	16,000
						12%
	14,000
	12,000					10%
Thousands
10,000					8%	%
In	8,000
					6%
	6,000
						4%
	4,000
	2,000					2%
	0					0%
	2015	2016	2017	2018	2019	2020
	Temporary Unemployment		Permanent Unemployment		Unemployment Rate (U3)

2

Source: Bloomberg. Data shown as of August 31, 2020.

THE U.S. HOUSING SECTOR HAS BEEN A BRIGHT SPOT FOR THE ECONOMIC RECOVERY

• Home sales strongest since housing boom in 2006.
• Supply of houses low.
• Home prices rising.

In Thousands

SAAR

	1600
	1400
	1200
Sales	1000
HomeNew	800
	600
	400
	200
	0

In Millions

SAAR

8
7
6
5	Sales
4	Home
3	Exsting
2
1
0

New Home Sales (L)

Existing Home Sales (R)

3

Source: Bloomberg. Data shown as of August 31, 2020.

CONSUMERS ARE BUILDING SAVINGS

• Historic low mortgage rates allowing homeowners to refinance.

Conventional 30Y Mortgage Rate vs. Refinancing Index

6%				6,000

	5%						5,000
Rate	4%						4,000
ConventionalMortgage						RefinancingIndex
3%						3,000
30Y	2%						2,000
	1%						1,000
	0%						0
	2014	2015	2016	2017	2018	2019	2020
			30Y Conventional Mortgage Rate (L)	Refinancing Index (R)

4

Source: Bloomberg. Data shown as of August 31, 2020.

UNEVEN RECOVERY IN STOCK MARKET

• Investors have preferred secular growth stocks with strong balance sheets.
• Cyclical sectors are down 20% YTD while Tech is up more than 20%.
• Lower long-term rates have supported elevated growth stock valuations.
• Broadly diversified portfolios have been held back by international, value, and small cap stocks this year.

Index Normalized at 100

140

120

100

80

60

40

20

0

12/2019	1/2020	2/2020	3/2020	4/2020	5/2020	6/2020	7/2020	8/2020
		Growth	10Y Yield	Value	International	Small Cap

5

Source: Bloomberg. Data shown as of September 22, 2020.

A COVID-19 VACCINE WOULD HELP BROADEN THE RECOVERY

• Over 120 potential vaccine candidates in the pipeline.
• Several in phase III trials that are expected to announce results in 2020.
• U.S. has pre-ordered millions of dosages from the leading vaccine contenders.

Doses (Millions)

800

Vaccine Supply Agreement - Initial Doses Ordered

700

600
300
500
400
100
300
					200
200			120
300						60	60
100		30		30
	100	100		100	100	100
0
AstraZeneca /	Moderna	Pfizer / BioNtech	Johnson &	Sanofi / Glaxo	Novavax
Oxford					Johnson

U.S. U.K. E.U. Japan

6

Source: Artis Ventures, as of June 26, 2020.

FEDERAL RESERVE'S NEW MONETARY POLICY

FRAMEWORK

• Short term rates expected to remain near 0% until three conditions met:
• 1. Economy reaches maximum sustainable employment.
  2. Inflation has risen to 2%.
  3. Inflation is on track to moderately exceed 2% for some time.

	16%
	14%		Inflation Target
			Unemployment (U3)
	12%		Core PCE
	10%
%	8%
	6%
	4%
	2%
	0%
	1990	1992	1994	1996	1998	2000	2002	2004	2006	2008	2010	2012	2014	2016	2018	2020

7

Source: Bloomberg. Data shown as of September 30, 2020.

BASE CASE OUTLOOK:

INVEST IN THE U.S. ECONOMIC RECOVERY

Economy

U.S. GDP is on a

gradually improving trend with near full recovery by end of 2022.

Risk: Prolonged virus impact that results in permanent damage.

PolicyMarkets

Monetary and fiscal	U.S. equity market
outperforms.
policymakers continue
to provide a safety net
for economy and
markets.

Risk: Political inaction.		Risk: U.S. elections and
	China relations.

8

Carrie Clasen Porter

SVP, Director of Strategic Initiatives - Investment Management

Invest in more.

Align your values.

Make an impact.

A New Approach to

How You Invest

10

The Evolution of Values-Based Investing

A style of investing that started long ago and has evolved over the years to what it is today.

1960s	1990	2016
Religious
MSCI KLD 400	U.S. SIF Foundation
organizations
Social Index	reports $8.7 trillion in
avoid sin stocks
created	sustainable assets
(alcohol, tobacco)

2019

Business Roundtable CEOs commit to lead companies for "the benefit

of all stakeholders"

Early 1980s	2006	2016	2020
First socially	United Nations	Morningstar	Larry Fink states
responsible mutual	Principles of	introduces	"sustainability and
funds created	Responsible	Sustainability	climate-integrated
	Investing (UNPRI)	ratings for funds	portfolios can
	created		provide better risk-
			adjusted returns"

Source: BlackRock

11

What is ESG?

Examples of environmental, social and governance (ESG) factors

Environmental		Social		Governance
Climate and		Well-being of		Transparency,
environmental		multiple		capacity, purpose
stewardship		stakeholders

•	Environmental impact	•	Employee diversity	•	Business ethics
	of supply chains	•	Employee health and	•	Board structure, and
•	Environmental impact		safety		diversity by gender
	of products	•	Product safety and		and race
•	Energy management		ethics	•	Accounting policies
•	Energy efficiency	•	Product impacts		and controls
•	Climate change	•	Supply chain human	•	Executive
	policies		rights		compensation
•	Water use	•	Consumer data	•	Strategic sustainability
			privacy and security		oversight
		•	Community impact

Source: Morningstar, Calvert

12

Measuring the Impact

13

Catalysts Driving the Shift to Values-Based Investing

1

2

3

4

5

Access to data, providing investors with insights to materiality and risk.

Increasing availability of investment strategies and solutions.

Performance of ESG strategies have proven to be competitive.

Investor interest has grown significantly and across demographics.

COVID and the disruption in 2020.

14

Values-Based Investing at BOKF

At BOK Financial, bridging your investment objectives with your personal values is a foundation of our investment philosophy.

Relationships are

Our process leads

built on knowledge.

to objective advice.

By understanding your values, we can select investments that help you to meet both your financial goals and to make the impact you desire.

15

Matt Stephani, CFA

President, Cavanal Hill Investment Management

EQUITY MARKET RETURNS

3 Month

	Value	Core	Growth
Large	5.6	8.9	13.2
Mid
6.4	7.5	9.4
Small	2.6	4.9	7.2
Int'l
2.3	6.3	10.2

Int'l Small Mid Large

1 Year

Value	Core	Growth
-5.0	15.1	37.5
-7.3	4.6	23.2
-14.9	0.4	15.7
-10.8	3.0	17.5

Int'l Small Mid Large

3 Year

Value Core Growth

2.6 12.3 21.7

0.8 7.1 16.2

-5.1 1.8 8.2

-5.1 1.2 7.3

Source: Morningstar. Returns in the style boxes are represented by the Russell indexes and the S&P 500 for the Large Cap Core space. Returns in the international boxes are

17

represented by the MSCI ACWI Ex USA indexes. Boxes shown in red represent returns below 0%. Gray boxes represent returns between 0% and 10%. Returns above 10% are shown in black. Data shown as of September 30, 2020.

U.S. EQUITY MARKET VOLATILITY

3,800	S&P 500 Index
	•
3,500	3,386
3,200	•
2,900
2,600	•
2,300	2,237
2,000

Fear resulted in a market drop of 34% from peak to trough.

Off the bottom, the market has rallied 50%+.

Why?

18

Source: Morningstar. Data shown as of September 30, 2020.

WHY DID MARKETS RECOVER?

Federal Reserve Total Assets

	$8,000
	$7,000
Billions USD	$6,000
$5,000
	$4,000
	$3,000
	1/1/2014	1/1/2015	1/1/2016	1/1/2017	1/1/2018	1/1/2019	1/1/2020

• Federal Reserve launched massive balance sheet expansion and lowered rates to tighten corporate bond spreads.
• In addition, the Fed announced a number of measures to help improve market liquidity.
• Expect continued Fed support for several years.

19

Source: Federal Reserve as of 9/30/2020.

BORROWING THE MONEY TO PAY FOR THE RECOVERY

• Fiscal stimulus and
delayed tax collections	0
have widened the
budget deficit
dramatically.	-500

•	U.S. Treasury issuance	-1000
	will hit record highs.
•	Fed quantitative easing	-1500
	helps absorb increased
	debt issuance, but there	-2000
	are longer term
	consequences.
		-2500

Federal Government Surplus/Deficit

(12 Mo. Rolling Window, $BN)

Budget Sequestration Relaxed

Last Click:

June: -$2,925 BN

-3000

'01

'03

'05

'07

'09

'11

'13

'15

'17

'19

20

Source: Strategas. Data shown as of August 31, 2020.

EQUITY MARKET OPPORTUNITIES & RISKS

Equities still remain attractive though they are not without risk. The economic damage from COVID remains severe, but recoveries are occurring in economies globally.

Equity Market Opportunities

• The Fed remains accommodative for financial markets
• Development of treatment/vaccine would encourage investors to add risk
• Massive amounts of cash on the sideline
• A 2021 recovery in industrial production could help value stocks rebound as well

Equity Market Risks

• A significant rebound in COVID beyond 2020
• Failure to have a vaccine before spring 2021
• Valuation is stretched
• Federal government deficits are exploding
• Political uncertainty and election results

Source: Data shown as of September 30,2020.	21

OPPORTUNITY FOR 2021

40%

35%

30%

25%

20%

15%

10%

5%

0%

Personal Savings Rate	• Limited ability to spend along with
	rising incomes meant the savings
	rate exploded higher.
	34%
	• Dry powder: record $4.5 trillion
	held in U.S. money market funds.
	• Bank deposits have increased
	nearly $2 trillion since February
	2020.
	• Money coming out of savings
	could drive economic surprises in
	2021.

Recession		Percent of Disposable Income

Source: Federal Reserve Bank of St. Louis. Personal saving is equal to personal income less personal outlays and personal taxes; it may	22
generally be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets

such as residences, Wall Street Journal. As of 7/31/2020

POLITICAL UNCERTAINTY IS NEAR-TERM RISK

60

50

40

30

Odds of Winning the 2020 Election

Biden	• The odds of a Biden Presidency
are now more than 50/50.

Trump

20

10

0
6/2019	8/2019	10/2019	12/2019	2/2020	4/2020	6/2020	8/2020

23

Source: PredictIt as of 9/30/2020

2020 CONGRESSIONAL ELECTION EQUALLY IMPORTANT

Partisan Control, Avg. Annual S&P Performance

(1933-2019, Excl. 2001-2002)

16.00%					• Historically, returns have been
					strongest with a divided Congress.
14.00%	13.60%	13.40%	13.00%	12.90%
12.00%					• The market appears most
				vulnerable to a Democrat
10.00%				9.30%	Congress regardless of the
			presidential party.

8.00%
6.00%			4.90%
4.00%
2.00%
0.00%
D Senate/R	R Sen/D	R Congress, R Congress, D Congress, D Congress,
	House/D	House/ R	D President R President D President R President
	President	President

24

Source: Strategas as of 9/30/2020

2020 PRESIDENTIAL ELECTION

IF BIDEN WINS

Markets will likely respond negatively at first to a Biden election as it likely results in higher corporate tax rates, dampening earnings.

Beneficiaries potentially include:

• Infrastructure companies
• Renewable energy
• US refiners
• Companies that export to China
• Drug discovery equipment providers

Companies at risk include:

• Domestic energy companies, the "frackers"
• Aerospace and defense
• Pharmaceutical and biotechnology
• For-profitprisons & education
• Domestic retailers

IF TRUMP WINS

Markets will likely respond positively to a Trump re-election, as it removes tax-rate increases from the list of investor concerns.

Beneficiaries potentially include:

• Domestic energy companies
• Healthcare companies including insurance, biotech, and pharma
• Aerospace and defense
• Financials
• Domestic retailers
• Industrial manufacturers

Companies at risk include:

• Renewable energy
• Companies with exports to China
• Importers

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Disclosures

The information provided herein was prepared by the Investment Management team of BOKF, NA. BOKF, NA is the bank subsidiary of BOK Financial Corporation (BOKF), a financial services holding company (NASDAQ:BOKF). BOKF offers trust and wealth management services through its subsidiaries including BOKF, NA (and its banking divisions Bank of Oklahoma, Bank of Texas, Bank of Albuquerque, and BOK Financial) and investment advisory services through its non-bank subsidiaries, BOK Financial Asset Management, Inc., Cavanal Hill Investment Management, Inc., and BOK Financial Private Wealth, Inc., each an SEC registered investment adviser, and BOK Financial Securities, Inc., also an SEC registered investment adviser and registered broker/dealer, member FINRA/SIPC (each an "Investment Affiliate") (collectively, "BOKF"). Distribution of this document is intended for informational purposes. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the author(s) as of the date prepared and are subject to change without notice and are not a complete analysis of any sector, industry, or security regardless of the date on which the reader may receive or access the information. The information provided is intended to be educational in nature and not advice relative to any investment or portfolio offered through an Investment Affiliate, and does not constitute any form of regulated financial, legal, or tax advice, or other regulated financial service. The content provided herein is not a solicitation for the investment management services of any Investment Affiliate, nor is it intended to constitute a recommendation for, or advice to, any specific person on behalf of any Investment Affiliate, as it does not take into account the financial objectives, situation, or needs of any specific person. This information is provided on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of said content, any risks associated therewith, and any related legal, tax, accounting, or other material considerations. Recipients should not solely rely on this material in making any future investment decision. To the extent that the recipient has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, they are encouraged to consult with a qualified lawyer, accountant, or financial professional.

This document may contain forward‐looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections, the securities and credit markets and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward‐looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward‐looking statements. These statements are not guarantees of future performance. Likewise, past performance is not a guarantee of future results. This content is prepared for the use of the Investment Affiliates and their clients and prospective clients, and may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of BOKF or BOKF, NA. Any unauthorized use or disclosure is prohibited. Receipt and review of this document constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained herein. This report should not be distributed without the attached disclosures, and is considered incomplete if the disclosures are not attached.

Charts are for illustrative purposes only and not indicative of any actual investment.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets. Investing involves risks, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.

BOK Financial® is a trademark of BOKF, NA. Member FDIC. Equal Housing Lender . ©2020 BOKF, NA.

INVESTMENT AND INSURANCE PRODUCTS ARE: NOT FDIC INSURED | NOT GUARANTEED BY THE BANK OR ITS AFFILIATES | NOT DEPOSITS | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | MAY LOSE VALUE

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Version 1 - Updated 9/30/2020