TRANSAMERICA 2021 MARKET OUTLOOK...commentary. He also heads Transamerica’s mutual fund sub-adviser selection and monitoring process, as well as product management. Tom holds a bachelor’s

TRANSAMERICA 2021 MARKET OUTLOOK

Not insured by FDIC or any federal government agency. May lose value. Not a deposit of or guaranteed by any bank, bank affiliate, or credit union.

2

ABOUT THE AUTHOR

Tom is the Chief Investment Officer of Transamerica Asset Management, the mutual fund arm of Transamerica. Tom has more than 30 years of investment management experience and has managed large mutual fund portfolios and separate accounts.

As a member of the senior management team, Tom heads Transamerica’s thought leadership efforts and provides perspectives to advisors, clients, the media, and general public. He writes and publishes Transamerica’s Market Outlook and other relevant commentary. He also heads Transamerica’s mutual fund sub-adviser selection and monitoring process, as well as product management. Tom holds a bachelor’s degree in political science from Tulane University, and an MBA in finance from the Wharton School at the University of Pennsylvania.

THOMAS R. WALD, CFA® Chief Investment Officer, Transamerica Asset Management, Inc.

3

WHERE WE STAND IN 2021

• As the second wave of COVID-19 inflicts exponentially rising damage throughout global society, the markets strive to look to the other side of the virus as high-efficacy vaccines have been developed. However, as widespread distribution of these treatments could still take months, investors may need to brace for slowing rates of economic growth and market volatility in the early part of 2021 before the recovery accelerates in the spring and summer months, providing a favorable backdrop for investors as the year moves forward.

• The aftermath of the presidential and congressional elections has allayed pre-election fears of a contested outcome. However, all eyes will be on Georgia in January for two runoff elections determining majority control of the Senate and, therefore, a strong presumptive impact on President-elect Joe Biden’s expected tax plan. History infers a market preference for split-party control of the White House and Congress.

• While U.S. economic growth could be challenged in 1Q 2021 as COVID-19 cases continue to rise, we look for the economy to accelerate meaningfully in 2H 2021 as vaccine accessibility dovetails with an accommodative interest rate environment and eventual fiscal stimulus, driving pent-up demand by consumers and businesses. This could result in annual gross domestic product (GDP) growth of 4% in 2021 helping the economy return to pre-virus levels of real aggregate GDP by year end.

• We believe there are strong long-term opportunities in U.S. stocks, however investors may need to incur some downside risks during the first few months of 2021 before the vaccines reach widespread distribution. Thereafter catalysts include economic and earnings recoveries, a lower-for-longer interest rate environment, and additional liquidity-based monetary stimulus from the Federal Reserve. Our year-end price target on the S&P 500® is 4,200 and we believe value stocks could finally be setting up for a meaningful catch-up period versus growth stocks as the year moves forward.

• Short-term interest rates should remain in a lower-for-longer environment as the Federal Reserve maintains the Fed Funds rate at a lower bound of zero for the foreseeable future. The Fed is also likely to continue large-scale, open-market asset purchases at or near current levels, providing further tailwinds for the broader markets. We see a range for the 10-year Treasury rate of 0.75%–1.35% trending toward the upper end as the yield curve steepens throughout the year.

• Credit fundamentals in the bond markets are likely to continue improving, however current credit spreads appear to reflect that. Therefore, we believe high-yield and investment-grade bond investors should expect coupon-type total returns in the year ahead. Excess returns can still potentially be achieved through active managers capable of identifying opportunities not found in passive bond indexes.

• We believe there could be attractive opportunities for long-term international equity investors given the expected global economic recovery in 2021. Investors need to recognize many uncertainties will affect the timing and magnitude of this recovery as numerous regions and countries battle the second wave of COVID-19. Those who stay the course with developed and emerging markets in the year ahead could be well rewarded.

4

THE STORM BEFORE THE CALM

Markets are the great discounter of future events, so much so they often look past what stands directly before them in determining the longer-term horizon. As dark clouds of exponentially rising COVID-19 cases continue to gather, and with it the economic impacts that could ensue in upcoming months, the same markets that identified the low point of recession and contraction last spring will likely be looking ahead to the calm after the storm.

COVID-19’s second act is creating a brutal trail of casualties far worse than its first. Daily case numbers now immensely exceed what many had hoped would have been the worst back in April. While the fatality rate in percentage terms has thankfully fallen, the absolute numbers are now at staggeringly tragic levels, as in more than half the amount of all U.S. lives lost in both world wars.

The metaphoric war on COVID-19 has had no shortage of heroes, just like the literal wars of our past. Frontline medical and healthcare workers have held the line against the advancing enemy much like the Union Army at Gettysburg, and the best minds of science have stormed the beaches of vaccine development and clinical trials comparable to the Allied forces on D-Day. As a result, there is now a path to victory, but just as those previous wars saw great challenges in their final months so will this one. We can now see the clear, but to do so we must look beyond an upcoming onslaught of wind, rain, hail, sleet, and snow.

As for the markets, their role in all of this is a relatively easy one. Keep looking out six months to a year as they usually do. There will undoubtedly be some rough patches along the way as the economy adjusts to a new round of sheltering and shutdowns, which will almost certainly lead to some degree of downside volatility at various points in the months ahead. As matters stand now, it’s quite likely such occurrences will represent opportunities for investors.

As we said at the outset of the pandemic, COVID-19 was a medical crisis requiring a medical solution and pretty much everything else — monetary and fiscal stimulus, lower interest rates, and new technologies to help business carry on — was a bridge. With high-efficacy vaccines becoming ready for distribution, we are now perhaps only months away from being on the other side of the bridge and the markets’ ability to see that is something history has proven to be a strong case for investors. With that said, we now bid a long-awaited goodbye to the year of 2020 and an optimistic welcome to 2021.

America has just concluded arguably its most contentious election in history and as the final results stand on the edge of the history books, the markets appear cautiously optimistic that a path has been cleared with limited collateral damage. Following more than a year of political warfare between the two parties that, at times, resembled a professional wrestling cage match, the message from the markets since November 3 has been one of optimism and welcome to a balanced government not straying too far to the right or left. History also tends to support reason for such optimism.

The aftermath of the presidential and congressional elections has allayed pre-election fears of a contested outcome. However, all eyes will be on Georgia in January for two runoff elections determining majority control of the Senate and, therefore, a strong presumptive impact on President-elect Biden’s expected tax plan. History infers a market preference for split-party control of the White House and Congress.

5

WORST FEARS NOT REALIZED

The markets have reacted favorably to the results of the election encompassing both the presidential and congressional outcomes, though the latter is still in question as majority control of the Senate will not be fully decided until two runoff elections are completed the first week of January. However, for the most part, the two predominant market fears of the election, which had created some degree of investor angst in the months preceding November, appear not to have come to fruition.

The first fear dealt with the prospect of a fiercely contested election perhaps casting a cloud of uncertainty lasting weeks or months like the George W. Bush-Al Gore controversial recount of 2000, which was not resolved until mid-December. History buffs among us might also cite the Rutherford B. Hayes-Samuel Tilden “brokered election” of 1876, which was not determined until the last week in February of the following year (back then, presidential inaugurations took place in March). In both of those cases, the markets declined during the post-election uncertainties, however other market dynamics were clearly going on in parallel.

Despite the fact President Trump has formally contested the results in several close battleground states, his legal efforts have not been successful in the courts, and the Electoral College has formally cast its votes confirming former Vice President Biden as the president-elect. Market reaction for the most part seemed to immediately confirm the end of contested election fears as the S&P 500 appreciated more than 4% and high-yield credit spreads (ICE BofA US High Yield Index Option-Adjusted Spread) fell about 0.60% between election day on Tuesday, November 3, and Friday, November 6. (The following Monday saw the release of initial vaccine data, so it is difficult to estimate election-based market optimism after that day).

Post-Election Market Reaction: Stocks Rally Credit Spreads Tighten November 2–November 5, 2020

The second fear stemmed from potential market volatility driven by a “blue wave” election scenario in which not only former Vice President Biden won the White House, but Democrats also gained a significant number of seats within the House of Representatives and achieved a net gain of three seats or more in the Senate, re-gaining majority control of that chamber. The market rally on November 4 was also being attributed to the Republicans’ apparent successful defense of the Senate and net gain of House seats, providing for a more balanced government between the two parties, which has in recent history coincided with strong market returns. However, shortly thereafter, we learned such balance was once again back in question.

3200

3250

3300

3400

3600

3500

3350

3550

3450

4.30

4.70

4.60

4.50

4.40

4.80

4.90

5.10

5.00

S&P 500 U.S. Corporate High Yield Credit Spreads

5.01

3510.45

4.36

3310.24

11/311/2 11/4 11/5

Source: Bloomberg

6

Market concerns of a clean sweep by the Democrats also extended beyond just the notion of a non-balanced government being historically less favorable to markets, as tax policy expressed by the Biden campaign was believed in many corners to have also created investor jitters. Specifically, the pending Biden tax plan, of which the new president would almost certainly need a Democrat majority-controlled Senate to pass into law, has been expressed to include rescinding the Trump tax cuts of 2017 and implementing an estimated $3.3 trillion in additional tax increases over the next decade (Tax Foundation Equilibrium Model estimate, October 22, 2020).

These potential tax increases would include:

• Raising the marginal corporate tax rate from 21% to 28%

• Increasing personal tax rates on top bracket earners from 37% to 39.6%

• Raising capital gains and dividend income taxes from a maximum of 20% to individual personal rates at certain thresholds

• Increasing inheritance taxes by eliminating capital gains step-up provisions

• Imposing an additional 12.4% Social Security payroll tax on individuals earning above $400,000 to be split evenly with their employers

There is likely enough in this pending plan, if passed and signed into law, to potentially create some level of adverse reaction in the markets.

ALL EYES ON GEORGIA IN JANUARY

As if the past year had not brought us enough unexpected twists and pending uncertainties, along comes the two Senate races in the state of Georgia, which through a bizarre chain of events will now proceed to runoff elections on January 5 with majority control of the Senate hanging in the balance. This situation is perhaps only fitting to have been created in the equally bizarre year of 2020.

To fully appreciate this strange predicament, one might first want to recognize the rotation of Senate seat elections are divided up roughly by one-third every two years so no one state is scheduled to have both seats up for election in the same year. However, due to Georgia’s incumbent Republican Senator John Isakson’s decision to retire in 2019 for health reasons, a new Republican Senator, Kelly Loeffler, was appointed by the governor. However, appointed Senators are not granted incumbency for the entire remainder of their predecessor’s term, only until the next election year, meaning Senator Loeffler was up for immediate reelection in 2020 rather than at the end of Isakson’s term in 2022. This off-cycle Senate election then dovetailed with Georgia’s other Senate seat held by Republican David Perdue, originally on the docket for 2020. This type of scenario has occurred before in other states, but it is not common.

Post Election: Runoff Contests Will Determine Senate Majority

Republicans 50 Democrats 48 Undecided 2

Source: The Wall Street Journal

Republican Democrat Undecided

Source: The Wall Street Journal

7

Furthermore, Georgia is different than most states in that its senatorial elections require a majority of votes to determine winners rather than a plurality. In a field of more than two candidates, which both Georgia elections consisted of, no candidate reached 50%, which then requires a separate runoff election between the top two candidates. On January 5, Republican incumbents David Perdue and Kelly Loeffler once again face Democrat challengers Jon Ossoff and Raphael Warnock for Georgia’s two Senate seats, and this time around with just two candidates in each race, an official winner will be determined.

Now to further put all of this into a situation most Hollywood producers would not believe in a movie script, it just so happens that the final tally on the Senate election concluded with a 50-48 edge in the Republicans’ favor. If either Perdue or Loeffler emerges victorious on January 5, the Republican majority is secured for the next two years. However, if both Ossoff and Warnock win, the Senate will be tied at 50-50, allowing Vice President-elect Kamala Harris to cast any tie breaking votes, therefore providing the Democrats with a practical majority. A lot is on the line in the Peach State the first week of January.

SENATE MAJORITY CONTROL COULD HAVE MARKET IMPACTS

At the current time, we believe the markets are expecting the Republicans to hold onto at least one of the two seats January 5 and maintain control of the Senate, though recent polls are showing extremely close races in both contests. Should challengers Ossoff and Warnock prevail, the shift to a Democrat-controlled Senate could force the markets to reconcile and interpret two important potential developments far less likely under a Republican-controlled Senate.

These would be:

• Longer-term market prospects of a non-balanced government

• Potential passage of the Biden tax plan

HISTORY INFERS MARKET PREFERENCE FOR SPLIT-PARTY CONTROL OF THE WHITE HOUSE AND CONGRESS

While it is next to impossible to decipher precisely why and for what specific reasons markets might go up or down over any four- or eight-year timeframe, it is probably fair to say that all else being equal, markets prefer a balance between the two parties regarding the president and Congress. From a practical standpoint, there is the argument investors feel more comfortable during political gridlock when the government has less ability to change existing market dynamics. From a more empirical point of view, over the past 40 years markets have posted strong returns during presidential terms of divided power between the two parties. Three quick examples:

In 1980, Ronald Reagan, the former Republican governor of California, was elected president in a landslide and with it the Republicans gained control of the Senate, although Democrats maintained a healthy majority in the House of Representatives. In 1982, the Democrats regained control of the Senate and held it with the House for the remainder of President Reagan’s two terms ending in January of 1989. The compounded annualized total return of the S&P 500 during those eight years of balanced power between the president and Congress rounded to 16%.

7

8

History Infers Market Preference for Split-Party Government S&P 500 Returns

In 1992, Bill Clinton, Democrat governor from Arkansas, was elected president and Democrats regained control of the Senate along with their existing majority in the House. In 1994, Republicans won back control of the House and Senate and proceeded to hold them throughout President Clinton’s two terms ending in January of 2001. During those final six years in which there was split-party control of the White House and Congress, the S&P 500 posted annualized total returns of better than 21%.

In 2008, Democrat Senator Barack Obama from Illinois was elected president, and, in that year, Democrats also maintained majorities in the House and Senate. However, in 2010, Republicans took back control of the House and in 2014 regained the majority in the Senate. The S&P 500 for President Obama’s six years of split control between the White House and Congress posted annualized total returns of better than 12%. Similar returns during these presidential terms were also seen in the Dow Jones Industrial Average.

History Infers Market Preference for Split-Party Government Dow Jones Industrial Average Returns

Source: Bloomberg, Transamerica Asset Management

‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17

S&P 500 Total ReturnBalanced Government

Reagan (Republican)Democratic House Democratic Senate

January 1981 to

January 1989

Annualized Return: 15.8%

Clinton (Democrat) Republican House Republican Senate

January 1995 to

January 2001

Annualized Return: 21.5%

Obama (Democrat) Republican House Republican Senate

January 2011 to

January 2017

Annualized Return: 12.4%

Source: Bloomberg, Transamerica Asset Management , Inc. All indexes are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.

Source: Bloomberg, Transamerica Asset Management

‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17

DJIA Total ReturnBalanced Government

Reagan (Republican)Democratic House Democratic Senate

January 1981 to

January 1989

Annualized Return: 17.2%

Clinton (Democrat) Republican House Republican Senate

January 1995 to

January 2001

Annualized Return: 21.2%

Obama (Democrat) Republican House Republican Senate

January 2011 to

January 2017

Annualized Return: 11.7%

Source: Bloomberg, Transamerica Asset Management , Inc. All indexes are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.

99

Obviously there were countless other factors impacting the markets during these three presidential tenures and it would be unfair and foolish to attribute all or most of the market returns to the simple political party compositions of the White House and Congress in those years. However, while the causation of balanced governments and market returns may be an arguable premise (perhaps most heavily argued by those politicians seeking control), the correlations remain quite clear historically and, we believe, provide at least some degree of validity. For this reason alone, it is probable the markets would react less favorably to double Democrat runoff victories in Georgia on January 5. (This is a market observation and not a political opinion).

RUNOFF ELECTIONS COULD ALSO DETERMINE FUTURE OF BIDEN TAX PLAN

Likely also of great interest to the markets will be the expected probability of President-elect Biden’s anticipated tax plan being presented to the Senate perhaps in 1H 2021 or 2H 2022. As described earlier, this plan is likely to hold many components, ranging from higher corporate tax rates certain to impact public company earnings statements, to higher individual and capital gains rates at larger income thresholds, as well as Social Security payroll increases and higher inheritance tax implications. Most estimates of increased total tax payments range from about $2–$3.5 trillion over the next decade. President-elect Biden has steadfastly argued none of these tax hikes will impact individuals earning less than $400,000 annually, however many disagree with that statement based on definitions of both tax and impact.

All else being equal, the markets probably will not like these higher taxes regardless of who pays them. Higher corporate tax rates will negatively impact public company earnings and, by definition, either the prices or the price-earnings ratios on stocks themselves. Arguments may be made that higher personal, payroll, capital gains, and inheritance taxes will serve a greater purpose and thus not be market unfriendly, but there are far fewer arguments they will be market friendly in and of themselves. Finally, there is perhaps the greater overall market fear that if the economy slips back into recession, for whatever reason, higher taxes, again regardless of where they come from, could be a scary proposition when combined with negative economic growth. For these reasons, the markets would likely prefer the Republicans maintain Senate control in January, making a transformative change in the federal tax code less probable.

It may also be worth mentioning that even with a double victory in the January Georgia runoffs, Democrats would still only be left with a technical majority as the 50-50 tie would leave absolutely zero room for error on a tax plan or any other legislation. Therefore, the markets still might find some comfort in knowing one dissent among a group of 50 could cancel out a Democrat majority at any given time.

10

All considered, the aftermath of the election likely leaves the market better positioned than where most had feared beforehand. Many had feared violence and social unrest following the results. That did not happen. Many had feared a long and drawn out post-election contesting of the outcome. That has not happened. Some investors feared a disproportionate amount of control shifting to one political party versus the other. The jury is still out on this one, but odds seem to favor that probably will not happen in the magnitude to which most were concerned.

So, politics aside, if that’s possible these days, the aftermath of the 2020 elections appear to have left the markets with less to worry about than before, though investors should stay tuned for January 5.

WHERE WE STAND: ELECTION AFTERMATH

• All eyes will be on Georgia on January 5 when a double runoff senatorial election will ultimately determine which party holds majority control of the Senate for the next two years.

• Majority Senate control will play a major and likely decisive role in the potential passage of the expected Biden tax plan, anticipated to add approximately $3 trillion of additional taxes to individuals and corporations over the next decade.

• With a Democrat majority in the Senate such tax legislation could be presented to Congress in 2H 2021 or 1H 2022.

• Recent history over the past 40 years infers that all else being equal, stocks strongly prefer a balanced government with split-party power between the president and Congress.

11

U.S. ECONOMY

While U.S. economic growth could be challenged in 1Q 2021 as COVID-19 cases continue to rise, we look for the economy to accelerate meaningfully in 2H 2021 as vaccine accessibility dovetails with an accommodative interest rate environment and eventual fiscal stimulus, driving pent-up demand by consumers and businesses. This could result in annual GDP growth of 4% in 2021, helping the economy return to pre-virus levels of real aggregate GDP by year end.

There has probably never been a more important time for investors to differentiate between the short-term and long-term prospects of the economy. Looking out over the next few months, there are real challenges threatening the pace of the recent record recovery since last March, and with COVID-19 cases surging and new rounds of business shutdowns, GDP growth for both 4Q 2020 and 1Q 2021 could ultimately prove to be anemic to negative. However, the months thereafter hold great promise, particularly in light of the immense pent-up demand that could be unleashed in 2H 2021 after widespread distribution of the vaccines and the expected mitigation of business restrictions, shutdowns, sheltering, and social distancing.

It is also important to recognize that upon the consummation of the post-COVID world, albeit incremental in nature, the economy will still likely have trillions of dollars of fiscal and monetary stimulus at its sails, as well as low interest rates for about as far as the eye can see. Taking all of this into consideration, we could be looking at one of the better economic setups in modern history, though there may be some pain in the interim. Patience and toughness could be a couple of traits in demand between now and baseball season — as in a baseball season with fans in the stands.

THE ECONOMIC ROLLER COASTER ROLLS ON

Forget about the markets for a minute or two. COVID-19 has created pure economic volatility unlike anything witnessed by anyone living today.

This was of course seen in the unprecedented variance between 2Q and 3Q GDP growth rates. Following what history has dubbed the Great Lockdown and 2Q cataclysmic shock of -31% annualized negative growth, the worst individual quarter of economic contraction since the Great Depression, the economy came roaring back in 3Q 2020 with a +33% annualized print, the best in history, as virus case numbers fell and the economy re-opened. Aside from the record economic volatility within those six months, the dramatic turnaround in those summer and early autumn months helped create a renewed sense of optimism among consumers and investors.

Economic Roller Coaster GDP Growth 4Q 2019–3Q 2020

Perhaps what investors felt most comforted by after the tremendous 3Q recovery was that the expected return to pre-virus aggregate GDP levels had been moved up considerably. Following the 2Q debacle, consensus forecasts had been for the U.S. not to return to its 2019 aggregate GDP equivalent until the end of 2022 or into 2023. Following the blowout 3Q GDP performance, that timetable was moved up by most pundits to the end of 2021, and this was clearly viewed favorably by the markets.

RISING COVID-19 CASE NUMBERS CREATE MORE UNCERTAINTY

The rate of increasing virus cases since the summer months has increased exponentially and has now reached more than five times the worst daily rates of last April. While there is great debate as to what precisely has caused this devastating and deadly second wave, be it the colder weather or a lack of safety measures, the fact is the economy will not be able to sustain its recent pace of growth under these types of case trends. Throughout the nation, state- and local government-imposed business restrictions, school closures, and other related shutdowns have begun in recent weeks and likely will continue over the following months. This will pressure 4Q 2020 and 1Q 2021 economic growth.

4Q19 2Q20 3Q201Q20

Source: Bloomberg

2.4%

-5.0%

-31.4%

33.1%

Source: Bloomberg, Bureau of Economic Analysis

1212

1313

Second Wave of COVID-19 Cases Surge in 2H 2020

U.S. COVID-19 Fatalities and Recoveries

Total U.S. CasesSource: Worldometers.info

May

20

Jun

20

Jul 2

0

Aug

20

Sep

20

Oct

20

Nov

20

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0

Fatalities Recoveries

13,750,608

8,107,270

273,077

Recoveries / Total CasesSource: Worldometers.info

1 Mar

15 M

ar

29 M

ar

12 A

pr

26 A

pr

10 M

ay

24 M

ay

7 Ju

n

21 Ju

n

5 Ju

l

19 Ju

l

2 A

ug

16 A

ug

30 A

ug

Sep

13

Sep

27

11 O

ct

25 O

ct

8 N

ov

22 N

ov

0%

10%

20%

30%

40%

50%

60%

70%

Fatalities / Total Cases

59.0%

2.0%

Source: Worldometers.info

Source: Worldometers.info

14

THE IMMOVABLE VIRUS MEETS THE IRRESISTIBLE VACCINE

Physicists and songwriters have long agreed that when an irresistible force meets an immovable object, something’s got to give. Nothing personifies this premise more than current COVID-19 virus trends and recently released COVID-19 vaccine data.

As we have said repeatedly over the past several months, we viewed the development of a successful COVID-19 vaccine as the biggest wild card for the markets and global society. Now with two vaccines developed by drug and biotech companies Pfizer and Moderna showing efficacy rates of about 95% each in double-blinded placebo-based Phase Three clinical trials, that wild card has now looked to have come up an ace.

High-Efficacy Vaccines Awaiting Distribution in 2021

In our opinion, while GDP growth rates over the next two quarters may now be in jeopardy of decline, these short-term trends are more than overshadowed by the vaccine game-changer news that now shines as the first real light at the end of the COVID-19 tunnel. In what could soon be recognized as the most remarkable accomplishment in medical history, concept was taken to proof of concept and then to medical outcomes at a warp speed never seen before in the history of science.

As the critical developments of the vaccines’ distribution to the public play out, it is important to realize the magnitude of this moment. The irresistible force will soon be available, and the immovable object could finally begin its move away. From an economic standpoint, this far outweighs a few months of potentially flat or negative GDP, as the pent-up demand unleashed in 2H 2021 should prove substantial. Medically and socially speaking, we are looking at prayers answered.

Source: Pfizer, Moderna

Pfizer BioNTech

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Moderna

95.0% 94.1%

Source: Pfizer Press Release, “Pfizer and BioNTech Conclude Phase 3 Study of COVID-19 Vaccine Candidate, Meeting All Primary Efficacy Endpoints,” November 18, 2020. Moderna Press Release, “Moderna Announces Primary Efficacy Analysis in Phase 3 COVE Study for Its COVID-19 Vaccine Candidate and Filing Today with U.S. FDA for Emergency Use Authorization,” November 30, 2020

15

THE ROLE OF THE FED WILL REMAIN CRUCIAL

The Fed was the first to arrive when the economic damage of COVID-19 initially appeared evident last March, and now markets are taking comfort in the notion it could be the last to leave.

Going all the way back to those first two weeks of March, Chairman Jay Powell and his fellow Federal Open Market Committee (FOMC) colleagues were the first to realize the economic carnage COVID-19 was about to wreak and decisively acted by taking the Fed Funds rate from 1.50% to zero, and then quickly re-implementing large-scale asset purchases of Treasury bonds and mortgage-backed securities (MBS) at a pace of $120 billion per month. Combined with newly Federal Reserve-sponsored programs authorized by Congress and the Department of the Treasury, such as the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility, the Fed quickly and efficiently stood ready to provide liquidity and credit support in unprecedented volumes. More than anything else since the virus-induced economic shock began last February, the Fed’s efforts to ensure access to credit and functioning markets ensured a single calendar quarter of disastrous market and economic downturns was not elongated and could be soon reversed.

Decisive Fed Action Lower for Longer is Likely

Looking forward, we feel the Fed’s interest rate and monetary policies will remain crucial to the economy’s recovery and the continued health of the markets, and we also believe nobody probably knows this more than the Fed itself. Therefore, we do not expect to see an increase in the Fed Funds rate anytime in the foreseeable future, which would probably mean until at least 2023. In addition, we think the Fed will maintain its level of $100 billion plus in large-scale asset purchases for at least the next year and likely longer. Therefore, we believe this ongoing low interest rate environment and open market activity should continue to be tangible economic and market tailwinds in 2021 and beyond.

Fed Funds Target Rate

Source: Bloomberg

5/31

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.75%

2.75%

2.25%

1.50%

2.50%

2.00%

6/30

7/31

8/31

9/30

10/3

1

11/3

0

12/3

1

1/31

2/29

3/31

4/30

5/31

6/30

7/31

8/31

9/30

10/3

1

11/3

1

Source: Bloomberg

1616

MORE FISCAL STIMULUS WILL BE NEEDED

While the Fed has been earning straight A’s on the monetary side, Congress is looking at report cards with much lower grades on the fiscal side. After passing the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March, the economy is now in dire need of a follow-up package of a similar magnitude. Since last summer, the two parties have been in continuous negotiations with House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin on the front lines. However, as the election came and went, disagreements over the total size of the package and amounts of dollars provided to state and local governments prevented deal closure.

There is now some probability we could see an interim package in the $1 trillion range directly focusing on unemployment insurance, Paycheck Protection Program loans to small businesses and assistance to state and local governments. This effort had been originally constructed through a bipartisan group of Senators, and while a trillion or so in relief is certainly appreciated at this point, it is unlikely to be enough as we believe more will be needed in the months ahead.

We are confident a more complete relief and stimulus agreement will eventually be reached, probably sometime in 1Q 2021. Should the Republicans hold the Senate by winning at least one of the runoff elections on January 5, the total amount would likely be in the range of about $2 trillion. In the event the Democrats win both races and regain an effective majority, the number could move closer to $3 trillion. In either case, time is of the essence and further delays, when combined with rising virus cases and business shutdowns, could push 1Q 2021 GDP growth into negative territory.

JOB GROWTH SLOWING

Since the historically horrific employment report of April, when the economy lost more than 20 million jobs and the unemployment rate rose to more than 14%, the steady drumbeat of positive job growth has served as an engine of growth during the recent recovery. However, that drumbeat is now finishing the year with a diminishing echo.

Monthly Job Losses / Gains and Unemployment During COVID-19 Pandemic

Nonfarm Payrolls Month Over Month Change

Source: Bureau of Labor Statistics

12/1

9

-15%

-10%

-5%

+184k +214k +251k

3.5%

14.7%

6.7%

+2.7M+4.8M

+1.8M

-1.41M0%

5%

15%

10%

2/20

1/20

3/20

4/20

5/20

6/20

7/20

8/20

9/20

10/2

0

11/2

0

Unemployment Rate (% RH)

-20.8M

+1.5M +711k +610k +245k

Source: Bureau of Labor Statistics

17

In the six months of May through October, job gains had been dramatic, as over 12 million people, representing more than half of those lost April jobs, had reentered the workforce and the November unemployment rate concluded at 6.7%. As a basis of comparison, a comparable unemployment rate was not reached until four years after the worst of the financial crisis in 2009, which had peaked at a much lower level of 10%.

COVID-19 Pandemic Unemployment Falls Faster Than After Financial Crises

While these job gains have certainly been good news, the rate of growth does not appear sustainable and it could soon be in directional jeopardy. Since June, the monthly job gains have fallen from 4.8 million to 245,000 in November, and this trend serves as one more reason why it is vital for Washington to get additional fiscal stimulus passed and signed into law. Otherwise, we could be looking at a scenario where positive job growth is threatened until the vaccines reach widespread distribution months from now.

INFLATION REMAINS BENIGN

Even before the COVID-19-induced economic shock and recession, there had been no growing signs at all of inflation breaking out of its multiyear funk and approaching the Federal Reserve’s long-term target of 2%. The deflationary pressures of the past nine months have only exacerbated inflation’s virtual absence in the economy and while theories abound as to how this might change in the future, we are not holding our breath.

October’s Consumer Price Index (CPI)* growth was flat for the month and 1.2% on a yearly basis. The Core CPI (ex. food and energy) was only up 1.6% annualized. The Fed’s preferred measure, Personal Consumption Expenditures (PCE), also posted unchanged readings for its October headline and core numbers. PCE in total displayed an annualized increase of just 1.5%.

Source: Bureau of Labor Statistics

2008

10.0%10/09

14.7%4/20

3.5%2/20

6.7%11/20

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0%

2%

4%

6%

8%

10%

16%

14%

12%

2020

Unemployment Rate (% RH)

Source: Bureau of Labor Statistics

*The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation.

1818

Inflation Remains Benign Personal Consumption Expenditures (PCE) Index Over Past Decade

Inflation Remains Benign Consumer Price Index (CPI) Over Past Decade

PCE Y/Y %

Source: Bureau of Economic Analysis

2010

2011

2012

2013

2015

2014

2016

2018

2017

2019

2020

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Core PCE Y/Y % Long-Term Fed PCE Inflation Target

CPI Y/Y %

Source: Bureau of Labor Statistics

2010

2011

2012

2013

2015

2014

2016

2018

2017

2019

2020

-0.5%

0.0%

0.5%

1.0%

2.0%

3.0%

1.5%

2.5%

3.5%

4.0%

Core CPI Y/Y %

Source: Bureau of Economic Analysis

Source: Bureau of Labor Statistics

So those waiting for inflation to pop will have to wait at least a bit longer. Of course there are calls that the immense influx of dollars to fund recent and future fiscal stimulus, as well as the trillions created by the Fed, will eventually manifest itself in higher long-term inflation rates, and this may well prove to be the case — someday. However, until inflation exceeds the Fed’s 2% target on a sustained basis, we will continue to view these low consumer price levels as non-threatening and beneficial to the ongoing economic recovery.

191919

CONSUMER SPENDING ALSO LOOKING FOR A BOOST

Consumer spending, representing the aggregate purchases of all goods and services by individuals and families, was one of the first metrics to emerge from the economic shock last spring when break-out monthly growth of 8.2% in May and 5.6% in June portended the record quarterly GDP growth upcoming in 3Q. However, since then, monthly growth has fallen to barely positive and serves as yet another important metric waiting on additional fiscal relief and stimulus.

Consumer Spending Monthly Growth During Pandemic

Accounting for approximately one-third of total GDP growth, consumer spending is a crucial metric. Therefore, these recent monthly reports could be evidence of the challenges awaiting the broader economy in the upcoming winter months. However, we would emphasize consumers have proven extremely resilient throughout recent cycles and we would expect them to be the first to show strength when we reach wider circulation of the vaccines.

THE BIG PICTURE

In a year featuring unfathomable economic numbers, the final tallies for 2020 are likely to look pretty rough but far from the terrifyingly horrendous annual forecasts many had put forth when the virus first shutdown the country back in March. It now looks that when the 4Q concludes, we will be looking at a yearly contraction of about -4%. This would rank as the fifth-worst year since 1929, but realistically speaking, still basically created by one single three-month exogenous shock followed by a nearly equivalent recovery. More importantly, 2020’s annual GDP will soon be water under the bridge best seen through a rearview mirror.

Growth in 4Q 2020 became more challenged as virus case numbers exploded and follow on economic relief from Congress failed to materialize. Following the exceptional 3Q recovery, the growth comparison was always going to be a tough one in 4Q, but these two developments will probably suppress that comparison worse than most may have thought just months ago. We are therefore looking for 4Q GDP to increase by only about 3% annualized, and more importantly, this pace does not appear sustainable into 1Q 2021.

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

-14%10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20

Source: Bloomberg

Source: Bureau of Economic Analysis Source: Bureau of Economic Analysis

20

2020 U.S. GDP Estimate Estimated To Be Among Worst in History

Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve 2020 Estimate

20%

15%

10%

5%

0%

-5%

-10%

-15%‘30 ‘35 ‘40 ‘45 ‘50 ‘55 ‘60 ‘65 ‘70 ‘75 ‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘10 ‘15 ‘20 (Est.)

2020-3.7%

Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve 2020 Estimate

These short-term pressures could accelerate during 1Q 2021, perhaps creating anemic growth for the first three months of the new year or even pushing us back into negative terrain. Should that occur, we would not view it as a double-dip recession or even a W-shaped recovery. We would view it more as the storm before the calm.

We look for a strong acceleration in growth during 2H 2021 as vaccines become nationally accessible, business restrictions and social distancing loosens, and pent-up demand is released into the economy. We think this could result in upwards of 6% growth for the latter half of 2021, translating to about 4% annualized growth for the year in total and back once again to the aggregate pre-virus levels of 2019.

U.S. Aggregate GDP Seeking Return to Pre-COVID Levels

1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20

Source: Bloomberg

$19.0T$19.0T$19.0T

$17.3T

$18.6T

$19.1T $19.3T

Source: Bloomberg, Bureau of Economic Analysis

21

Moreover, once there, we believe the economy will continue to benefit from trillions of dollars in both fiscal and monetary stimulus and close to zero short-term interest rates for at least two more years, if not longer. This could keep the economy above previous pre-virus trend growth of 2%, which in our opinion would continue to provide a favorable backdrop for investors.

WHERE WE STAND: U.S. ECONOMY

• We believe investors need to differentiate between short- and long-term economic prospects in the economy.

• Economic growth could be challenged in 1Q 2021 as COVID-19 cases continue to rise substantially and additional fiscal economic relief and stimulus from Congress remains elusive.

• However, we would look for the economy to accelerate meaningfully in 2H 2021 as vaccine accessibility drives loosening business and social restrictions, additional fiscal stimulus eventually filters through the system, and pent-up demand is released by consumers and businesses.

• This could result in the U.S. economy achieving annualized economic growth of 4% in 2021 and once again reaching pre-virus levels of annualized real aggregate GDP.

• Once this occurs, we see the Fed as continuing to be highly accommodative in terms of interest rates and open market activity, providing further tailwinds for a post-virus economy favorable for long-term investors.

22

U.S. STOCKS

There are likely strong long-term opportunities in U.S. stocks, however investors may need to incur some downside risks during the first few months of 2021 before the vaccines reach widespread distribution. Thereafter, catalysts include economic and earnings recoveries, a lower-for-longer interest rate environment, and additional liquidity-based monetary stimulus from the Fed. Our year-end price target on the S&P 500 is 4,200, and we believe value stocks could finally be setting up for a meaningful catch-up period versus growth stocks as the year progresses.

We believe U.S. stocks are likely setting up for a strong year in 2021, although the initial months could be subject to downside risk as various COVID-19-related uncertainties work themselves out. It is clearly a unique time for equity investors as the markets look to turn the corner on COVID-19 in the year ahead. However, doing so may require staying invested through far worse virus numbers than anything we have seen to date — if that even seems possible to imagine.

For this reason, we believe it is important to recognize short-term volatility in stocks between now and the spring will probably translate into longer-term opportunity. Perhaps it might be best for investors to look at the long-term criteria positioned to drive stocks higher over the next couple of years before fretting over what could take them lower at times over the next few months.

The longer-term case for stocks and why investors may want to be in on that case as 2021 begins is based on what we see as a handful of powerful trends continuing to gather steam. These include:

• The economic recovery continues to run ahead of initial expectations

• Corporate earnings growth also appears positioned to outpace earlier forecasts

• Interest rates should remain low for the foreseeable future

• The Fed will be continuing to provide liquidity-based monetary stimulus

• Given all these factors, stock valuations continue to appear attractive

It is these key criteria, in our opinion, that will be the basis of higher stock prices between now and the end of 2021 and beyond.

2323

1Q19 2Q19 3Q19

35%30%25%20%15%10%

5%0%

-5%-10%-15%

-20%-25%-30%-35%

4Q19 1Q20 2Q20 3Q20

Source: Bureau of Economic Analysis

2.9% 2.4%

-0.5%

2.6%1.5%

-31.4%

33.1%

Source: Bureau of Economic Analysis

THE ECONOMIC RECOVERY THAT BEGAN LAST SPRING IS RUNNING AHEAD OF EXPECTATIONS

Following the devastatingly painful economic shock in 2Q 2020, initial forecasts were that aggregate U.S. GDP would not reach pre-virus levels last seen in 4Q19 until sometime in late 2022 or early-to-mid 2023. Given the exceptional rebound in 3Q 2020, as well as recent vaccine news, we believe there is a strong probability pre-virus aggregate GDP can now be re-achieved by the end of 2021, reflecting a much earlier timeframe beneficial for stocks.

Economic Volatility Quarterly GDP During COVID-19 Crisis

We believe economic growth will likely begin slowing in 2021 and perhaps even turn negative in 1Q. However thereafter, with vaccines readily accessible to the general public, the next three quarters could average better than 6% annualized growth as pent-up demand drives aggregate GDP for the year by about 4%. There could be upside to these numbers depending upon other variables, such as the timing of vaccine distribution, the willingness of local governments to loosen business restrictions, and the timing and dollar amount of further economic relief from Congress.

23

2424

CORPORATE EARNINGS SHOULD ALSO FULLY RECOVER BY THE END OF 2021

We now also believe there is a high likelihood that along with the economy, corporate earnings growth will accelerate meaningfully in 2H 2021 and could surpass its annual pre-virus level of 2019. Current Factset Earnings Insight estimates now call for approximately $170 in S&P 500 operating earnings per share for CY 2021, representing about a 22% increase from 2020 but more importantly above CY 2019 record-level earnings of $163.

Corporate Earnings Recovery Expected in 2021 Annual Operating Earnings Growth of S&P 500 Companies 2019-2021

Like the broader economy, this upshot in profits growth will be back weighted and subject to momentum in consumer spending, business re-openings, and the implementation of fiscal stimulus. More of these factors seem to have now been recognized in upgraded forecasts, as the CY 2020 Factset Insight consensus estimate has increased since July by more than 10%, from $126 to $139, and the CY 2021 estimate by more than 4%, from $163 to $170.

INTEREST RATES SHOULD REMAIN LOW FOR THE FORESEEABLE FUTURE

History has shown that, for the most part, low interest rates and stocks are very good friends. With that premise in mind, it looks like the last line of Casablanca may be in order, for at least a couple of more years.

Interest Rate Tailwind Lower-for-Longer Begins

Source: Factset Earnings Insight, November 20, 2020

CY 2019 CY 2020 (est.) CY 2021 (est.)

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

3.6%

21.9%

-14.2%

3.25%

3.00%

2.75%

2.50%

2.25%

2.00%

1.75%

1.50%

1.25%

1.00%

0.75%

0.50%

0.25%

0.00%5/16 11/16 5/17 11/17

Lower-for-Longer

5/18 11/18 5/19 11/19 5/20 11/20

Source: Bloomberg

Source: Bloomberg

Fed Funds Target Rate 10-Year U.S. Treasury

Source: Factset Earnings Insight, November 20, 2020

Source: Bloomberg

2525

We believe the Fed will not be raising short-term interest rates until at least 2023 and quite probably further out than that. While the yield curve is likely to steepen modestly this year with the 10-year Treasury rate re-eclipsing 1% or higher, we are still looking at an extremely low rate environment by historical standards. This should prove advantageous for the profitability of public companies and for stock valuations.

THE FED IS LIKELY TO CONTINUE ONGOING LIQUIDITY-DRIVEN STIMULUS

In addition to overseeing a lower-for-longer interest rate environment, we believe the Federal Reserve will also continue to provide liquidity to the markets in the form of ongoing large-scale asset purchases. The Fed is currently purchasing about $120 billion per month in Treasury bonds and MBS, and we expect this level of activity to continue throughout all of 2021.

Monetary Policy Tailwind Balance Sheet Expands as Open Market Activity Ramps Up

Previous market cycles have shown a strong correlation between high levels of Fed open market activity and stock returns. Such was the case during November 2008–November 2014, when stocks averaged better than 17% annualized total returns as the Fed purchased more than $4 trillion of bonds in the open markets over those years through three separate and intermittent programs.

STOCK VALUATIONS REMAIN ATTRACTIVE

While many are calling current equity valuations stretched, we believe investors should not take current price-earnings multiples and simply compare them to past levels. Doing so, in our opinion, not only misses the potentially accelerating profits as we emerge from the COVID-19 crisis but also fails to account for the historically low interest rate environment and the relative value that now holds for stocks.

For this reason, we often look to a metric known as the Equity Risk Premium (ERP) serving as a basis of comparison between stock earnings yields and longer-term, risk-free rates. This relatively basic equation simply subtracts the current 10-year Treasury bond yield from either current or forward-looking S&P 500 earnings yields and compares that differential to past levels.

Source: Bloomberg

12/19 1/20 2/20 3/20 4/20

Trill

ions

5/20 6/20 7/20 8/20 9/20 10/20 11/20

$4.5

$5.0

$5.5

$6.0

$6.5

$7.0

$8.0

$7.5

12/20

Source: Federal Reserve

26

Equity Risk Premium (ERP) Earnings Yields and Interest Rates (2020 Estimated Earnings Yield)

-3% -2% -1% -0% 1% 2% 3% 4% 5% 6% 7%

0%

10%

20%

30%

40%

-10%

-20%

Equity Risk Premium

S&P 500 Forward Earnings Yield 3.84%10-Year U.S. Treasury Yield 0.84%Equity Risk Premium 3.00%

Forward earnings yield calculated as next calendar year expected EPS/currentindex value.

minus

11/30/20

Subs

eque

nt 3

-Yea

r Ann

ualiz

ed R

etur

n 11/30/20 ERP: 3.00%

Source: Bloomberg, FactSet, Transamerica Asset Management

-3% -2% -1% -0% 1% 2% 3% 4% 5% 6% 7% 8%

0%

10%

20%

30%

40%

-10%

-20%

Equity Risk Premium

S&P 500 Forward Earnings Yield 4.66%10-Year U.S. Treasury Yield 0.84%Equity Risk Premium 3.82%

Forward earnings yield calculated as next calendar year expected EPS/currentindex value.

minus

11/30/20

Subs

eque

nt 3

-Yea

r Ann

ualiz

ed R

etur

n 11/30/20 ERP: 3.82%

Source: Bloomberg, FactSet, Transamerica Asset Management , Inc.

Source: Bloomberg, FactSet, Transamerica Asset Management , Inc.

Therefore, when looking at the ERP on stocks as of November 30, the S&P 500 maintained an expected earnings yield of 3.84% on forecasted CY 2020 operating profits of $140, and 4.66% on 2021 forecasted profits of $170 (Factset Earnings Insight, November 20, 2020). When subtracting out the 10-year Treasury yield of 0.84% (November 30 closing yield), this calculates to ERPs of 3.00% for 2020 and 3.83% for 2021, representing historically attractive entry points of which comparable past levels have provided for above-average future three-year returns. In applying this metric combining both earnings potential and current interest rates, we continue to view stock valuations as attractive.

Equity Risk Premium (ERP) Earnings Yields and Interest Rates (2021 Estimated Earnings Yield)

27

Nov

07

May

08

Nov

08

May

09

Nov

09

May

10

Nov

10

May

11

Nov

11

May

12

Nov

12

May

13

Nov

13

May

14

0

500

1,000

1,500

2,500

2,000

S&P 500

$0

$1

$2

$3

$5

$4

0%

1%

2%

3%

5%

4%

Fed Balance Sheet Fed Funds Rate Upper Bound

Nov

07

May

08

Nov

08

May

09

Nov

09

May

10

Nov

10

May

11

Nov

11

May

12

Nov

12

May

13

Nov

13

May

14

Nov

14

Source: St. Louis Fed

WILL HISTORY RHYME?

Mark Twain once said, “History may not repeat itself, but it often does rhyme.” With this in mind, it may be worthwhile to revisit a potentially rhyming element to current market conditions we first brought up a few months ago.

Back in 2011, in the aftermath of the financial crisis, the Fed was three years into a zero-interest-rate environment and in between its second and third formalized quantitative easing program, implementing large-scale open market asset purchases of Treasury bonds and MBS. In the autumn of that year, it became apparent that both real aggregate GDP (inflation adjusted) and S&P 500 operating earnings would be reaching record highs by year end and finally eclipsing their pre-crisis levels from before 2008. Yet the Fed remained exceptionally accommodative, maintaining zero rates until December 2015 and, in September 2012, implementing another quantitative easing (“QE3”) program, buying $40 billion MBS monthly through November 2014.

Comparing Global Financial Crisis and COVID-19 Crisis Market Environments

Global Financial Crisis (11/1/2007–11/28/2014)

COVID-19 Crisis (12/31/2019–11/30/2020)

Dec

19

Jan

20

Feb

20

Mar

20

Apr

20

May

20

Jun

20

Jul 2

0

Aug

20

Sep

20

2,000

2,400

2,800

3,200

4,000

3,600

S&P 500

$0

$1

$2

$4

$8

$6

$3

$7

$5

0.0%

0.5%

1.0%

2.0%

1.5%

Fed Balance Sheet Fed Funds Rate Upper Bound

Dec

19

Jan

20

Feb

20

Mar

20

Apr

20

May

20

Jun

20

Jul 2

0

Aug

20

Sep

20

As we close out 2021, the current market environment is strikingly similar. Real aggregate GDP and S&P 500 operating earnings appear prepared to move above pre-virus highs sometime in the next year, the Fed Funds rate is at a lower bound of zero, and the Fed is buying Treasury bonds and MBS at a pace of $120 billion per month.

From November 2011 to November 2014 , when all of these market conditions were much like they are now or soon could be, the S&P 500 posted an annualized total return of better than 20%, translating into a cumulative total return of more than 75%. While we are not forecasting equivalent returns on stocks for the next three years, the broader message here is with a similar situation perhaps setting up in the year ahead, we could be seeing the same type of highly favorable market backdrop this time around — and one that could potentially prove conducive to double-digit, annualized total returns for the next couple of years.

Despite favorable long-term opportunities, immediate uncertainties pose short-term downside risk.

28

Now for the tough part. While we believe favorable long-term opportunities clearly exist for stocks, we could be nonetheless staring straight into the eyes of some difficult interim days ahead. Granted, markets are typically good at looking past relatively short periods of time, however this concept could be rigorously tested between now and the spring months. Short-term developments potentially presenting downside risk to stocks in the early months of 2021 are likely to include:

Investor psychology pertaining to the stellar returns since the market began its recovery last March. Despite the rational catalysts driving stocks since last spring, we are still looking at an anomalous nine-month return of better than 60% on the S&P 500. The simple truth here is anytime markets move this far this fast, they are susceptible to short-term profit taking and can be more vulnerable to any negative news.

Historic Stock Strength S&P 500 March 23–November 30, 2020

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

2/19

3/5

3/20 4/

4

4/19

5/4

5/19

6/3

6/18

7/3

7/18

8/2

8/17 9/

1

9/16

10/1

10/1

6

10/3

1

11/1

5

11/3

0

3/23/20to

11/30/2063.88%

2/19/20to

3/23/20-33.79%

Source: Bloomberg

Source: Bloomberg

S&P 500 Total Return

Source: Bloomberg

29

Total U.S. CasesSource: Worldometers.info

May

20

Jun

20

Jul 2

0

Aug

20

Sep

20

Oct

20

Nov

20

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0

Fatalities Recoveries

13,750,608

8,107,270

273,077

Rising virus cases are likely to create increasing business disruptions. As COVID-19 cases tragically increase to previously unfathomable levels, local governments are once again imposing severe business and social restrictions. This will undoubtedly show up at least to some extent in 4Q 2020 and 1Q 2021 economic numbers and has generated a recent wave of downgraded GDP forecasts for those two quarters. While we are believers that 2H 2021 will more than make up for this, markets could certainly react negatively in the next few months as these slower rates of growth come to fruition.

Second Wave of COVID-19 Total Cases, Recoveries, and Fatalities

Markets could react negatively should both Democrat senate candidates win in the January 5 double runoff election in Georgia. Should Democrat challengers Raphael Warnock and Jon Ossoff defeat Republican incumbents Kelly Loeffler and David Perdue, we could see markets react adversely based on the Democrats’ majority control of both chambers of Congress alongside Mr. Biden in the White House. This scenario would likely increase the probability of the expected Biden tax plan being brought to and potentially passing the Senate in late 2021 or sometime in 2022. Recent polls are now inferring a virtual dead heat in both runoff races.

Any or all these developments could create downside volatility in the months ahead and even potentially contribute to a market correction of 10% or more. That said, given the previously described long-term catalysts, we would likely view such downside as a buying opportunity.

VALUE STOCKS MAY FINALLY HAVE THEIR LONG-AWAITED CATALYST

The past 10 years has unquestionably been a lost decade for value stocks in relative comparison to their growth counterparts. This is best displayed in a comparative chart of the Russell 1000® Growth (R1G) and Russell 1000 Value (R1V) indexes, which since the end of 2010 has shown a cumulative differential of approximately 200% favoring growth stocks. To use an age-old boxing adage, “If this had been a fight, they would have stopped it by now.”

Source: Worldometers.info

3030

Growth Minus Value

Grow

thV

alue

Source: Bloomberg

11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17 11/18 11/19 11/20

250%

200%

150%

100%

50%

0%

-50%

Source: Bloomberg

Growth vs. Value Disparity of Returns November 2010–November 2020

There are numerous reasons why growth has outperformed value over the past decade. They tend to begin with the fact that since the end of the financial crisis and Great Recession in 2009, we have seen continuous below-trend growth with annual GDP averaging slightly above 2% and only reaching 3% in one year since then, thus creating a sustained scarcity-of-growth environment favoring high-growth companies at the relative expense of value. This environment has also challenged cyclical stocks within the value universe that typically benefit more from sharp and above-trend upward moves in the economy.

While a formal recession was avoided between 2009 and 2020, the lower-trend growth of that era seemed to place value stocks in a rut as flat to inverted yield curves also pressured the earnings of bank stocks, a major constituency of most value indexes.

On the other side of the coin, innovative growth companies were capitalizing on new technologies, and evolving changes in consumer behavior began to favor those technologies. When COVID-19 led to quarantines and shelter-in-place lifestyles in the first half of 2020, it created a strong preference in the markets for “stay-at-home” stocks with products best prepared for the new and more isolated daily routines brought about by the virus. As a result, the growth-versus-value difference only diverged wider, with a year-to-date differential between the R1G and R1V of 36% (+33% vs. -3%) between December 31, 2019, and November 30, 2020.

Growth vs. Value Disparity of Returns November 2019–November 2020

50%

40%

30%

20%

10%

0%

-10%

11/1

9

12/1

9

1/20

2/20

3/20

4/20

5/20

6/20

7/20

8/20

9/20

10/2

0

11/2

0

Source: BloombergGrowth Minus Value

Value

Grow

th

Source: Bloomberg

31

It is important to recognize that reversals in trends of this duration and magnitude typically do not suddenly emerge without specific catalysts. However, given what could be a dramatic, vaccine-driven shift in economic growth and consumer behavior in 2021, a change of the guard, at least one signaling some level of historical regression to the mean for value stocks, could be upon us in 2021.

The thinking here begins with a dramatic shift in the economy and consumer behavior during 2H 2021. This could have the following very real effects:

• A general lift in the economy favoring a larger number of value stocks than growth stocks

• A change in leadership away from high-tech growth stocks benefitting more directly from the stay-at-home environment created by the virus

• A steepening of the yield curve benefitting bank stocks within the value universe

• Once a sustained rotation into value stocks might appear imminent, the markets could then begin to focus on the valuation disparity between the two styles, hence further driving a longer-term convergence

It is important to recognize, in our opinion, any change in leadership from growth to value could prove to be more of a 2H 2021 phenomenon. The short-term economic challenges of the next few months, resulting in pressured growth in 1Q 2021, combined with the lack of fiscal stimulus from Congress could further augment the scarcity of growth for a few more months, allowing growth stocks perhaps one last hurrah before spring. This period could prove to be an opportunistic one for investors to begin building value positions or re-balance growth profits into the value arena. Then as the vaccines begin to work their magic, both medically and economically beginning sometime in 2Q 2021, it could then finally be game on for value stocks.

THE BIG PICTURE

As we enter 2021, we believe stocks could see some downside risk to start the year as large gains since the recovery began nine months ago could cross with slowing economic growth caused by rising virus cases and a lack of sufficient fiscal economic relief from Congress. Given the historic strength in stocks since last spring, these negative currents could create a quick but sharp selloff prior to widespread distribution of the vaccines.

However, we then see a clearing likely to take place as the summer months approach, resulting in a path toward the loosening of government-imposed business and social restrictions ultimately leading to a sharp rise in economic growth.

Based on this scenario, we see upside to the current consensus estimate of $170 for S&P 500 2021 operating earnings and believe about 5% higher at $179 is clearly realistic. Assuming earnings growth of 8–10% in 2022 puts operating earnings for that year in a range of $193–$197. Applying the current price-earnings multiple of 21–22x forward earnings infers a range of about 4,060–4330 with a midpoint just below 4,200.

32

WHERE WE STAND: U.S. STOCKS

• We believe there are strong long-term opportunities in U.S. stocks, however investors may need to incur downside risks during the first few months of 2021 before the vaccines reach widespread distribution. Our year-end 2021 price target for the S&P 500 is 4,200.

• Downside risks during the first few months of 2021 include rapidly rising COVID-19 cases and a slowing rate of economic growth in 4Q 2020 and 1Q 2021.

• Long-term catalysts include economic and earnings recoveries running ahead of expectations, a lower-for-longer interest rate environment, and additional liquidity-based monetary stimulus from the Fed. All of this could prove similar to a scenario last seen during 2011–2014, when markets performed extremely well.

• We believe current stock valuations are still mostly attractive when combining the perspective of rising earnings growth in the year ahead with the ongoing low interest rate environment.

• Value stocks could finally be setting up for a meaningful catch-up period versus growth stocks after vaccine distribution boosts the economy and potentially changes consumer behavior.

33

INTEREST RATES

Short-term interest rates should remain in a lower-for-longer environment as the Federal Reserve maintains the Fed Funds rate at a lower bound of zero for the foreseeable future. The Fed is also likely to continue large-scale open market asset purchases at or near current levels, providing further tailwinds for the broader markets. We see a range for the 10-year Treasury rate of 0.75%–1.35% trending toward the upper end as the yield curve steepens throughout the year.

There is no question the actions of the Federal Reserve have proved crucial to the economic and market recovery since the dark days of last March. In fact, if there were an MVP for pulling the U.S. economy out of the abyss, the Fed would probably be the unanimous choice.

By taking the Fed Funds rate once again down to a lower bound of zero in about the blink of an eye during the first two weeks of March, Chairman Jay Powell and his colleagues on the FOMC regained important credibility with the markets. It is clear in retrospect that the Fed, initially criticized as overreacting to the early virus numbers at the time, had a far better understanding than pretty much anyone else on the planet of the real economic damage COVID-19 was about to wreak.

Lower-for-Longer Interest Rates 11 Days in March Ushers in New Era

Fed Funds Target Rate

Source: Bloomberg

2/28

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

2.00%

1.75%

2/29

3/1

3/2

3/3

3/4

3/5

3/6

3/7

3/8

3/9

3/10

3/11

3/12

3/13

3/14

3/15

3/16

3/17

3/18

3/19

3/20

3/21

3/22

3/23

3/24

3/25

3/26

3/27

3/28

3/29

3/30

3/31

10-Year U.S. Treasury

Source: Bloomberg

34

Source: Bloomberg

12/19 1/20 2/20 3/20 4/20

Trill

ions

5/20 6/20 7/20 8/20 9/20 10/20 11/20

$4.5

$5.0

$5.5

$6.0

$6.5

$7.0

$8.0

$7.5

12/20

Source: Bloomberg

The move from 1.50% to zero over just 11 days during the first half of March was only the beginning. The Fed quickly followed up with the re-implementation of quantitative easing, also referred to as large-scale open market asset purchases designed to restore liquidity and confidence in the equity and bond markets.

The ongoing monthly purchases of $120 billion of Treasury bonds and MBS played a major role not only in the stock market’s recovery but also credit spreads. High-yield and investment-grade bonds have seen their differentials versus comparable maturity Treasurys more than cut in half since late March after tripling during the month previous. In taking these strong open market actions, the Fed’s conviction was shown in the rapid increase of its balance sheet, which has almost doubled from about $3.7 trillion in August of 2019 (back when it was letting maturing bond principal payments roll off without reinvestment) to more than $7.2 trillion as of the end of November.

Fed Bond Buying Federal Reserve Balance Sheet Jumps with Expanded Open Market Activity

35

LOWER-FOR-LONGER RATE ENVIRONMENT REMAINS IN PLACE

In our judgment, it is highly unlikely the Fed will raise short-term rates anytime in the foreseeable future. In putting a more precise calendar on this, we would say the Fed will not be increasing the Fed Funds rate until at least 2023 and perhaps longer. Given the ongoing challenges of recovering from the COVID-19 economic shock as well as the recent rise in cases, we would be surprised if raising rates even comes up as a topic of discussion in Fed minutes over the next year.

We also see an extended schedule of continued large-scale asset purchases at current levels for at least another year or so. This would translate into monthly volumes of more than $100 billion of open market purchases in Treasury bonds and MBS, which would continue to provide broad liquidity for the markets. We view both modes of policy — lower rates and large-scale asset purchases — as ongoing tailwinds for the equity and credit markets as the economy recovers longer term and we move closer to a post-COVID-19 environment.

NEW POLICY ON INFLATION SUPPORTIVE OF LOWER RATES

A lower-for-longer rate environment was further augmented on August 27 at the Fed’s annual symposium. Chairman Powell announced a policy blueprint entitled, “Statement of Longer Run Goals and Monetary Policy Strategy,” in which he unveiled the Committee’s intention to embark upon “long run inflation targeting,” an approach focusing more on symmetrical analyses of inflation, meaning a higher tolerance for inflation to run above the Fed’s longer-term target of 2% for sustained periods of time before taking action to combat it.

Interest Rates and Inflation Fed Funds and Personal Consumption Expenditures (PCE) 2009 - 2020

Our interpretation of this policy change is this: following the long era we are currently experiencing in which inflation has been trending solidly below the Fed’s target of 2%, we need to see an extended period above that level before the Fed would take action based solely on inflation criteria. Looking forward, the Fed would not be likely to raise rates in response to the first report of PCE rising above 2%, or the second, third, or fourth for that matter. This represents a meaningful change of inflation perspectives at the Fed and one that in our opinion, all else being equal, supports the argument we will not see rate hikes from the Committee for some time.

In this same announcement, Chairman Powell also verbalized an adjustment to the Fed’s approach to employment trends, which for the most part in the past had always been viewed as a direct harbinger to higher rates of inflation. However in recent years, this “Phillips Curve effect” has been called into question under the recent environment, which, until the virus-induced contraction earlier in the year, had seen inflation remain benign and bouncing along multiyear lows even as the economy was at or near full employment, as seen in February’s 3.5% unemployment rate.

Source: Bureau of Economic Analysis, Bloomberg

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

Fed Funds RateCore PCE Y/Y% Fed Long-Term Inflation Target

Source: Bureau of Economic Analysis, Bloomberg

35

36

Source: Bureau of Labor Statistics, Bloomberg

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

10%

8%

6%

4%

2%

0.0%

Unemployment RateCore PCE Y/Y%

Therefore, like inflation, the Fed now seems content to let full employment run for sustained periods of time before taking monetary action to prevent an inflationary chain from occurring between tight labor markets and broader consumer price levels. While this is now far less of an immediate issue given the higher levels of unemployment since the COVID-19 pandemic began, the Fed’s policy and perspective change on the relationship between employment levels and inflation also bodes for a lower-for-longer interest rate environment.

PAST HISTORY MAY ALSO INFER THE FED’S PLAN IS NOT TO CHANGE THE PLAN

When looking at relatively recent history of Fed interest rate and open market activity during and following times of severe economic and market stress, we believe it is important to look back upon the immediate aftermath of the financial crisis of 2008–2009. In the years proceeding that downturn, the Fed kept the Fed Funds rate at a lower bound of zero all the way until the end of 2015 and engaged in three separate quantitative easing programs lasting through November of 2014, ultimately totaling large-scale Treasury and MBS purchases of more than $4 trillion.

This clearly represents a precedent for the Fed keeping rates low and buying lots of bonds well into the recovery phase following a major economic downturn. It may also be pertinent to recognize that while the ultimate duration of the COVID-19 economic crisis is yet to be fully known, its depth has already been proven to be materially worse than the financial crisis. It should not be surprising to see the Fed keep its foot on the monetary pedal for some time even as the economy and markets continue to improve.

THE YIELD CURVE IS LIKELY TO STEEPEN MODESTLY IN THE YEAR AHEAD

While we believe the Fed will keep short-term rates anchored close to zero, it is likely in our opinion longer-term rates could move higher as the economy ultimately improves and vaccines take global society closer to a post COVID-19 world. This widening of the curve is probably more apt to occur in 2H 2021 rather than in the immediate months ahead.

Source: Bureau of Labor Statistics, Bloomberg

Breaking the Phillips Curve Unemployment and Inflation 2009–2020

37

With this in mind, we estimate a reasonable range on the 10-year Treasury bond yield over the next year to be 0.75%–1.35%, with the caveats it could break out higher if post-vaccine-distribution economic growth in 2H 2021 tracks at higher than 4% for the year. We could also see dips below this range between now and 2Q 2021 as the economy fights through higher infection rates and a stagnant start to the New Year should Congress not reach an agreement on more economic stimulus.

WHERE WE STAND: INTEREST RATES

• We believe the Fed will be maintaining the Fed Funds Rate at a lower bound of zero for the foreseeable future, keeping short-term rates in a lower-for-longer environment until at least 2023.

• We also believe the Fed will maintain large-scale asset purchases at current monthly levels of approximately $120 billion throughout 2021.

• This lower rate environment combined with ongoing large-scale asset purchases should provide a tailwind for the markets in the year ahead.

• We believe the yield curve will continue to steepen through the end of 2021, with the 10-year Treasury bond rate moving toward the upper end of a range of 0.75%–1.35%.

Tale of Two Yield Curves Treasury Curve Changes Slope With Lower Rate Environment

Source: Bloomberg

3M 2Y 3Y 5Y

11/30/20 8/27/19

7Y 10Y 30Y0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

Source: Bloomberg

38

Credit fundamentals in the bond markets are likely to continue improving, however current credit spreads appear to reflect that. Therefore, we believe high-yield and investment-grade bond investors should expect coupon-type total returns in the year ahead. Excess returns can still potentially be achieved through active managers capable of identifying credit opportunities not found in passive bond indexes.

CREDIT MARKETS

This past year has been one of historic volatility in the corporate credit markets accompanied by unprecedented policy actions from the Federal Reserve and U.S. Treasury. Thanks to swift and coordinated action by the Treasury and the Fed, skyrocketing credit spreads for high-yield and investment-grade bonds quickly nosedived in the spring months and are now finishing the year just stone throws above where they started. Investors who sold at peak credit spreads the last week in March incurred heavy losses. Those who bought at that time saw once-in-a-decade-type gains, and those that simply, or perhaps maybe not so simply, rode it out are finishing up the year in the green.

In looking at the volatility of credit spreads in 2020, high-yield bonds (ICE BofA High Yield Index Adjusted Spread) began the year with yield differentials to comparable maturity Treasurys of 3.60%. On March 23, the worst point of the COVID-19-induced credit scare, they elevated to 10.87% before beginning the path back down to their November 30 spread of 4.33%. BBB-rated bonds (ICE BofA BBB Corporate Index Option Adjusted Spread) began the year at a credit spread of 1.30% and saw peak levels reach 4.88% before closing November back at 1.43%. Higher-quality investment-grade bonds (ICE BofA Corporate Index Option Adjusted Spread) began the year with differentials to Treasurys of 1.01% and saw their peak reach 4.00% in March before finishing November at 1.12%.

3939

12/19 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20

0%

2%

4%

5.19% 4.70%

2.09%

1.80%

2.84%

3.12%

6%

8%

10%

12%

Yield to Worst - U.S. High Yield Corporate Bonds

Yield to Worst - U.S. BBB Corporate Bonds

Yield to Worst - U.S. Investment Corporate Bonds

US High Yield Corporate Bonds represented by the Bloomberg Barclays US High Yield Bond Index, US Investment Grade Corporate Bonds represented by the Bloomberg Barclays US Investment Grade Corporate Bond Index, US BBB Corporate Bonds represented by the Bloomberg Barclays US Corporate Bond - BBB Index Source: Bloomberg

Spread Volatility Credit Spreads Spike and Recover During COVID-19 Crisis

Few years for the fixed income and credit markets begin with roller coaster profiles such as these just behind their shoulder. For the brave of heart who can close their eyes and still see the carnage of last February and March, and for those who choose not to, here is perhaps a more boring but welcome assessment of the corporate credit markets as we look into 2021.

• High-yield and investment-grade bonds will likely see little to no spread compression, making their total return potential likely one of coupon-type returns.

• We expect the Fed to maintain its low interest environment and continue heavy, liquidity-based monetary policy through large-scale asset purchases, providing a friendly fundamental backdrop, though credit spreads seem to already be reflecting this.

• Previous history infers an extended period of zero short-term interest rates combined with large-scale asset purchases and positive economic growth should prove favorable for high-yield and investment-grade bonds over longer-term market cycles.

• There could be a potential rough patch in the early months of the year, as COVID-19 cases continue to spike before vaccines are readily available and incoming leadership at the Treasury Department begins to implement new policy and likely renews soon-to-expire emergency credit facilities.

• Recently elevated high-yield default rates should begin working themselves through the system by 2H 2021 and this will likely be a market focus throughout the year.

LOWER-FOR-LONGER RATE ENVIRONMENT AND LIQUIDITY-ORIENTED MONETARY POLICY FROM THE FED SHOULD HELP PROVIDE FOR STRONGER CREDIT FUNDAMENTALS

Practically speaking, it only makes sense the Fed’s zero rate interest policy, which we believe will likely be in effect for at least two or three more years, should provide a fundamentally favorable backdrop for the credit markets. Lower rates should allow for better interest coverage ratios and stronger balance sheets, and the trillions coming from large-scale Treasury and MBS purchases should continue to provide a favorable market environment.

40

$2.522

20

18

16

14

12

10

8

6

4

2

0

$2.4

$2.3

$2.2

$2.1

$2.0

$1.9

$1.8

$1.7

$1.6

$1.5

$1.4

9/08

10/0

8

11/0

8

12/0

8

1/09

2/09

3/09

4/09

5/09

6/09

7/09

9/09

8/09

11/0

9

10/0

9

Source: Bloomberg, Transamerica Asset Management

High-Yield Spread (LH) BBB Spread (LH)Investment Grade Corporate Spread (LH) Fed Balanced Sheet ($T; RH)

TrillionsMoreover, history seems to also provide at least some degree of confirmation of this premise. In the aftermath of the financial crisis from November 2008–November 2014, the Fed held short-term rates at zero and provided record levels of liquidity by purchasing more than $4 trillion in Treasury and MBS. Over those six years, the economy posted positive, albeit below trend, rates of GDP growth, averaging less than 2% annually. During that time, high-yield credit spreads declined from their record highs of 19.9% to 4.7%. BBB spreads fell from 7.7% to 1.8% and higher-quality, investment-grade bonds dropped from 6.4% to 1.4%. When making this comparison to the current environment, we also point out there is a strong probability, in our opinion, economic growth after vaccine distribution could trend well above 2% for at least two or three years.

A Look Back at History Credit Spreads Declined as Fed Balance Sheet Expanded (Sept 2008 – Nov 2009)

Source: Bloomberg, Transa