When Do You Buy Snow Tires? Before the Snow.

Sapient Investment Committee

October 11, 2019

We’re doing something a little different this time, employing a Q&A format to address four separate, but
related, topics we feel are important and timely for investors today. Here at Sapient we’re having regular
discussions on each of these topics, and we wanted to use this letter as an opportunity to share our
current thoughts with you. Feedback and follow-up questions are very much welcomed and encouraged,
so please don’t hesitate to reach out.

1. What is Sapient’s view of the ongoing U.S.-China Trade Talks?
We don’t have a crystal ball telling us when the U.S.-China trade talks will wrap up. However, we do
believe a deal will eventually be negotiated between the two countries, and the tariffs in effect today
are temporary in nature. We believe they are primarily a means to an end in these trade negotiations.
Although tariffs are not Sapient’s preferred tool for the job, we recognize China has been an
exceptionally egregious trade partner with the U.S. and other countries for decades. We remain
optimistic that a more thoughtful and fair trade agreement will ultimately emerge from this process.

2. Is Sapient concerned about a recession within the next 12-24 months? What have recessions
meant for investors in the past?

A recession in the next year or two is not a sure thing, but we’re concerned enough about the risk of
one that we continue to leave client portfolios positioned more defensively than we would in more
normal economic environments. With equity and fixed income market valuations, corporate profit margins, and employment numbers all at or near record highs, as well as a record-long 10+ year bull-
market which feels a bit long in the tooth, we believe the risk is rising for a potential recession and/or

meaningful market correction in the short- to medium-term.
Generally, recessions in the U.S. are accompanied by bear markets. Going back to 1960, there have
been seven recessions lasting an average of 14 months1 with accompanying bear market losses
averaging -38%. 2 In three of those seven recessions, the bear market started beforehand including the dot-com stock market crash in the early 2000s.

3 This is why Sapient believes it is prudent to position
portfolios more defensively well in advance of a recession. When do you buy snow tires? Before the
snow.

3. What are the implications of negative interest rates around the world?
There are around $15 trillion of global bonds trading with negative interest rates today, which means
for every $1 invested in these bonds the bondholder is expected to receive less than $1 in return at
maturity. This has been an on-again/off-again situation in many parts of the world since 2014, but it is
truly historic and would have been unfathomable to investors even 10 years ago. Sapient has not
invested any client monies in negative yielding bonds, and we have no intention to do so in the
future. However, the negative interest rates abroad have had a ripple effect on the U.S. and continue
to pull our interest rates here down, especially longer-term rates. As a result, building fixed income
portfolios with an acceptable yield continues to be a challenge.

4. What is an inverted yield curve and what are the implications for investors?
The term yield curve may sound cryptic, but it is quite simply a chart which plots the current interest
rates being paid for US Treasury bills, notes, and bonds with different maturity dates. In normal times,
investors receive higher interest rates for longer-dated securities, meaning 10-year notes normally
pay a higher interest rate than 2-year notes, and 2-year notes normally pay a higher interest rate than
3-month bills, and so on. However, there are times when this relationship changes and suddenly 3-
month bills are paying a higher interest rate than 2-year notes or even 10-year notes. When this
happens, as it did this past year for first time in over a decade, it’s called an “inverted” yield curve. It
can be an ominous sign, occurring prior to every U.S. recession going back to 1955, though it also
happened once without a recession following it in the 1960s.

4 But otherwise, an inverted yield has
been reliable indicator that a recession is coming within the next 3 years, which makes it useful but
also difficult to time. The last time the yield curve inverted was in late 2005/early 2006, and the market
rose another 25% until finally rolling over in October 2007. We view this recent inversion of the yield
curve as simply one more data point supporting our decision to keep client portfolios positioned
more defensively.

Thank you for allowing us to serve you and steward your investment capital with great care.

1. https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
2. https://www.invesco.com/static/us/investors/contentdetail?contentId=049233173f5c3510VgnVCM100000c2f1bf0aRCRD
3. https://www.investopedia.com/a-history-of-bear-markets-4582652
4. https://www.washingtonpost.com/business/2019/08/14/recession-watch-what-is-an-inverted-yield-curve-why-does-it-matter/

Sapient Private Wealth Management
101 E Broadway
Suite 480
Eugene, OR 97401

(541) 762-0300
info@sapientpwm.com