September 2020 Capital Markets Commentary - the Amalgamated ...

September 2020 Capital Markets Commentary
                             By: Robert J. Majdecki, Senior Vice President & Chief Investment Officer

                    “Do the best you can until you know better. Then when you know better, do better.”
                                                                                                                 Dr. Maya Angelou
Fixed Income
Continuing on the positive path of the year, fixed income markets again had positive performance in the 3rd quarter of 2020, albeit
much lower than the first two quarters. Additionally, world central banks, including the U.S. Federal Reserve, continued their
accommodative policies in light of the Covid-19 pandemic. The third quarter was characterized by the carry-over of economic
momentum from the second quarter, as states continued to lift restrictions to reopen their economies. Perhaps it was no surprise
that some of the hardest hit and most economically sensitive areas of the fixed income market benefited.

In their most recent meeting, the FOMC again left interest rates unchanged and signaled that they would keep interest rates on hold
through 2023 or 2024 amid “considerable risks” to the economic outlook. According to most reports there is unanimity at the
Federal Reserve to do whatever it takes to support the recovery.

Low positive returns were the case across all maturity spectrums during the 3rd quarter as yields remained on the lower end of
perceived bounds. The Barclays Aggregate posted a +0.62% return for the quarter and the Barclays Intermediate Index was at
+0.61%. However, the 1-3 year Government Index only earned +0.10% for the quarter. The reason for the continued low return is
due mainly because short rates can’t go much lower. The 10-year Treasury yield ended the quarter at 0.66%, which was
unchanged from June 30th. The 5 year Treasury yield ended at 0.28%; the 2 year Treasury yield ended at 0.13%, and the 1 year T-
Bills moved to 0.12%. The 2 to 10 year spread widened to 65 basis points. Annualized quarterly bond market returns over the past
five years had been in a low range. However, using the Barclays Aggregate Index, the five year average annual return thru
September 2020 was approximately 4.15%, which is 0.15% lower than it was at June 30, 2020. Currently the annualized 1 Year
return on the Barclays Aggregate as of June 30, was still high at approximately 7.0%

Fixed Income Markets - Looking Ahead
The 3rd quarter of 2020 marked another impressive quarter of returns for most asset classes after the severe pullback in equities
during the 1st quarter. Even with these positive returns, however, most asset classes are still negative for the year. The bond market
continues to be one of the best performing asset classes year-to-date as the Fed continues to help support the bond market through
quantitative easing. As more conservative investors choose to move away from the volatility of the stock market, the demand for
bonds has driven the price up despite lower interest rates. Unfortunately, this will not last forever. Look to see volatility for the rest
of the year with low yields and low returns on bonds for 2021.

Market volatility continues to move rates in a narrow band, and future fixed income performance will remain more
challenging owing to low interest rates around the world. The expectation is that monetary policy will remain highly
accommodative for several years to support the economic recovery.

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Equity
As mentioned last quarter, we continue to live in extraordinary times, and the realities of a pandemic have become an unexpected
new normal. Yet, despite a turbulent September, equities in the 3rd quarter continued a strong rebound from their March lows.
There seems to be a possibility that this bounce in economic activity set a solid backdrop of support for a new bull market.

Both domestic and international stocks across all size and style categories, as well as U.S. real estate investment trust (REIT)
securities, had positive performance during the quarter. International stock returns were also impacted by the weakening U.S.
dollar. During the quarter, international small-cap stocks were the best performing sector and U.S. REIT securities were the worst
performing. However, elevated uncertainty tied to the pandemic and presidential election is likely to trigger periodic downswings
in equities for the remainder of 2020.

Although U.S. and Global markets were still under significant pressure of Covid-19’s spread across the globe, both U.S. and
International equities enjoyed positive performance in the 3rd quarter. All of the U.S. indices below were positive for the 3rd
quarter. On the U.S. side, the Russell 1000 Index rose the most with a quarterly return of +9.47%. The S&P 500 returned +8.92%,
the Dow Jones index returned +8.21%, and the Russell 2000 returned +4.93%. During this 3rd quarter run, the International
markets also enjoyed a positive mood. During the quarter the EAFE Index posted a +4.87% return.

Equity Markets - Looking Ahead

OK, now where do we go. In general, 2020 has been anything but average, and the announcement that President Trump
and First Lady Melania Trump contracted Covid-19 a few weeks ago adds to the list of uncertainties surrounding the
pandemic. The annual flu season is upon us and we can only wait and see what impact, if any, the fall and winter
months will have on the daily number of Covid-19 cases, and the knock-on effect to the economy. While the economic
recovery has been stronger than expected, and income remains above the pre-pandemic peak, funds will run out in the
4 th quarter if Congress fails to pass a fresh round of fiscal stimulus.
Amidst all the “noise,” the market has history on its side. The 3 rd quarter was an unusually strong quarter with the S&P
500 gaining 8.9% while making new all-time highs. Historically, a strong 3 rd quarter is a good omen for the 4 th
quarter.
The above said, longer-term outlook for stocks looks positive, with support from economic growth, corporate earnings and interest
rates. In the near term, expectations are that volatility will remain elevated and markets will consolidate recent gains. We don’t
believe the gains experienced since March will be matched in the months ahead, but we do think a durable economic expansion
will give legs to the new bull market.

Uncertainty surrounding the US elections will be the key theme for markets in the 4th quarter. The quarter ahead looks
increasingly challenging amid virus concerns, waning fiscal support, an unpredictable Presidential election and rising U.S.-
China tensions. At the same time, full valuations leave little margin for error and are likely to drive more moderate gains.

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The Economy

The Economy amid the Coronavirus (Continued). The economy is still healing from the devastating effects of the Covid-19
economic shutdown. While the job market is recovering, through September we have only recouped a little more than half of the
jobs lost in March and April. Most economists agree this was the easy part of the recovery. Now we must move into the harder
part where uncertainty abounds, as the post Covid-19 economy looks very different than the pre Covid-19 economy. Combine this
with the U.S. presidential election and you have a lot of unknowns around the recovery, as fiscal policies post-election will be
heavily dependent upon the results.

Although we have had slow economic growth, the U.S. economy continued to contract as the year progressed. The final reading
for second quarter 2020 GDP showed an annualized decline in economic growth of 31.4%, which is the largest percentage decline
on record. The unemployment rate finished the quarter at 7.9%, which shows improvement from the previous quarter’s 11.1%.
Domestic inflation remains low as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures
(PCE) index, stayed below the Fed’s target of 2.0% with a reading of 1.6% in August 2020.

Jerome Powell, the chairman of the Federal Reserve, stated he felt that the U.S. economy could soon face significant headwinds,
especially as more time passes without fiscal stimulus. If the markets are always forward-looking some have questioned then,
‘Does Wall Street line up with what is happening on Main Street’? While major indexes - which receive the most media attention -
like the S&P 500 and the NASDAQ-100, might lead you to believe that the market is outpacing the economy, this is only part of
the story. However, outside of tech stocks, Wall Street has not returned to pre-pandemic levels. It seems, outside of minor
exceptions, Main Street has yet to recover, but progress is being made.

Although we did see a rise in economic growth during the quarter, it was slow. However, the U.S. housing market is one of the
few areas that has surpassed levels prior to the pandemic with newly built home sales showing the highest numbers in 14 years and
existing homes sales also returning to pre-crisis levels. This is largely due to the Fed cutting the Federal Funds Rate to 0.25% and
stating in September that rates are unlikely to rise for several years until the economy as a whole has recovered.
The Economy - Looking Ahead
Economy growing slowly, but for how long.
As we enter the 4th quarter, several major unknowns raise concerns, such as: Will we get a vaccine? Will we get a stimulus
package and what will it look like? Who will win the election? Will the results of the election be accepted right away? How will
the UK’s rapidly approaching Brexit decision affect international markets? For better or worse, the answers to these questions will
have an impact on the economy.

Perhaps even more important than the outcome of the election is the Federal Reserve’s plan to keep interest rates low for years.
They recently adjusted their mandate to target higher inflation than they have in the past. This might sound strange to the casual
observer, but a lack of inflation is one of the perceived problems economists believe has slowed growth over the past decade. This
should be positive for the economy in the short term to support more borrowing. The longer-term ramifications will be important
to keep an eye on as the multi trillion-dollar Federal Reserve balance sheet expansion already had some economists warning of
inflation before this policy adjustment.

Last quarter we said that the rest of 2020 would be hard to predict. Given the pandemic’s hold on the U.S. and globally, it
is unsure if anyone can predict where the economy is headed either near term or longer out.
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 This report contains information and statements which have been obtained from and are based upon secondary sources
 Amalgamated Bank of Chicago believes to be reliable. However, Amalgamated Bank does not guarantee its accuracy,
 completeness or suitability for any particular purpose. The information contained in this commentary may be incomplete or
 condensed. All opinions, estimates and statements, contained in this report, constitute Amalgamated Bank’s judgment as of the
 date of the report and are subject to change without notice. A number of factors, including but not limited to economic and
 market conditions, which are beyond the ability of Amalgamated Bank to control or predict, could cause actual results or events
 to differ materially from those contained in this report. Amalgamated Bank undertakes no obligation to update this report or
 any statement in light of new information or future events.
 This report is for informational purposes only, is not intended to be investment advice and should not be construed or relied
 upon as a recommendation to buy or sell certain types of securities.