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First Quarter 2020 Market Commentary

Over the course of the first quarter of 2020, the S&P 500 declined -19.60% and entered bear market territory. As can be typical during market breaks, smaller cap indices fared worse than their larger cap brethren. The Russell Mid Cap Core index dropped -27.07% while the small cap Russell 2000 declined -30.62%. It is noteworthy that regardless of market cap class, the growth indices outperformed their value counterparts by wide margins - over ten percentage points in most instances. Companies not directly exposed to the industrial economy

or discretionary spending held up relatively better than cyclical areas. While still experiencing significant declines, these sectors included Information Technology (-12.22%), Health Care (-13.07%), Consumer Staples (-13.39%), and Utilities (-14.19%). On the other end of the spectrum, areas related to the financial and/or industrial economy bore the full brunt of the market decline. These sectors included Energy (-50.06%), Financials (-32.34%), Industrials (-27.41%), and Materials (-26.60%).

The beginning of the year found investors focused on risks that have been present for some time including Brexit, impeachment proceedings, Middle East tensions and China trade tensions. The coronavirus (COVID-19) was not on the investment radar screen. This changed abruptly as the pandemic rapidly spread in Northern Italy toward the end of February. The rapid onslaught of the COVID-19 virus caused governments worldwide to shut down large swaths of their economies in a bid to slow infection rates. Investment markets reacted severely.

Domestic Equity Market Recap

Source: Northern Trust

EQUITY INDICES (%) Period Ending 3.31.20

Large CapS&P 500Russell 1000Russell 1000 GrowthRussell 1000 ValueMid CapRussell US Mid Cap CoreRussell US Mid Cap GrowthRussell US Mid Cap ValueSmall CapRussell 2000Russell 2000 GrowthRussell 2000 Value

-12.35 -19.60 -19.60 -6.99 5.09 6.71 10.51 -13.21 -20.22 -20.22 -8.04 4.63 6.21 10.38 -9.84 -14.10 -14.10 0.91 11.31 10.35 12.95 -17.09 -26.73 -26.73 -17.19 -2.19 1.89 7.65 -19.49 -27.07 -27.07 -18.31 -0.81 1.85 8.77 -14.91 -20.04 -20.04 -9.45 6.53 5.61 10.89 -22.70 -31.71 -31.71 -24.13 -5.97 -0.76 7.22 -21.73 -30.62 -30.62 -24.01 -4.66 -0.27 6.89 -19.10 -25.77 -25.77 -18.60 0.07 1.67 8.87 -24.68 -35.67 -35.67 -29.67 -9.52 -2.43 4.78

BENCHMARK RETURNS (3 TO 10 YEAR ANNUALIZED)

1M 3M YTD 1Y 3Y 5Y 10Y

The COVID-19 pandemic and the social distancing policy responses to slow its advance have resulted in a sharp deterioration in economic activity. In response, governments and central banks worldwide are employing both fiscal and monetary policy to offset the impact. In the United States, the Federal Reserve (Fed) cut the target Federal Funds rate twice during the first half of March for a total reduction of 75 basis points. The latter reduction was accompanied by the announcement of a $700 billion quantitative easing program. In the corporate credit markets, spreads continued to widen and liquidity deteriorated. In response, on March 23 the Fed announced a number of additional measures to

Domestic Economic Overview

Source: Berkshire Bank Wealth Management, FactSet as of April 21, 2020

EMPLOYMENT

remedy the situation. This included an uncapped commitment to purchase agency mortgage backed securities. Additionally, the Fed implemented two facilities which will purchase corporate bonds and support liquidity in that markets. As for fiscal policy, the Group of Twenty (G-20) nations have collectively pledged to spend $5 trillion to offset the economic freeze. For its part, the Federal government has launched the massive $2 trillion US Coronavirus Aid, Relief and Economic Security (CARES) Act. This legislation provides for the following: checks distributed to most households; increased and extended unemployment benefits; direct aid for large companies that have been deeply damaged by the epidemic; loans for small

companies that retain workers; and aid to states. If needed, there are already discussions regarding additional initiatives. The impacts on the labor markets have been perhaps the most profound. Since lockdowns and social distancing came into effect in mid-March more than 22 million Americans, roughly 13.5% of the labor force, have filed an initial unemployment claim – the largest recorded increase since the data series began in 1967. As a result, the headline unemployment rate rose to 4.4% in March, and is forecast to hit double digits in the coming months with knock-on effects on consumer confidence and spending.

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Very few areas were spared during the first quarter. Most markets, with the exception of Japan, fared worse than the U.S. markets. Emerging markets (EM) are an area of particular concern. A price war in the oil markets between Russia and Saudi Arabia exasperated an already difficult situation for energy export based EM economies. Additionally, the U.S. dollar has strengthened versus most EM currencies as investors seek safe havens. This

As we mentioned above, the Fed responded to the pandemic by decreasing the Federal Funds rate. The first reduction of 50 basis points occurred on March 3 and was soon followed with the Fed cutting its targeted rate to 0-25 basis points on March 15. The reductions in the Federal Funds rate were accompanied by a quantitative easing program and

facilities which will support the corporate bond market, as well as other areas of the fixed income market. As you can see from the chart below, the yields on Treasury bonds with maturities less than 10 years have all dropped well below one percent. The stress introduced by the pandemic in the corporate credit markets can be seen from the graph of option adjusted spreads

below. The spreads of corporate bonds over treasuries, which have averaged around 128 basis points, ballooned to 255 basis points by the end of quarter. This is a reflection of investor concerns regarding credit quality, ratings downgrades and possible business failures. The expansion of spreads in the high yield corporate debt market was even more pronounced.

International Equity Market Recap

Domestic Bond Market Recap

EQUITY INDICES (%) Period Ending 3.31.20International EquityMSCI EuropeMSCI JapanMSCI EAFEMSCI Emerging Markets

1M 3M YTD 1Y 3Y 5Y 10Y -14.49 -24.25 -24.25 -14.94 -1.80 -0.75 3.03 -6.71 -16.45 -16.45 -6.26 1.27 2.17 4.11 -13.27 -22.72 -22.72 -13.90 -1.27 -0.06 3.29 -15.41 -23.59 -23.59 -17.42 -1.29 0.02 1.04

BENCHMARK RETURNS (3 TO 10 YEAR ANNUALIZED)

Source: Northern Trust

will make it more difficult for EM companies to service their dollar denominated debt.

Source: Berkshire Bank Wealth Management, FactSet as of April 20, 2020

US Treasury Yield Curve3.5

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Current as of March 31, 2020 1 Month Ago Start of 2020 1 Year Ago 2 Years ago

Domestic Bond Market Recap continued

Source: Northern Trust

Source: Berkshire Bank Wealth Management, FactSet as of April 20, 2020

FIXED INCOME INDICES (%)

Bloomberg Barclays Aggregate

Bloomberg Barclays Gov/Credit

Bloomberg Barclays Treasury

Bloomberg Barclays Intermediate Gov/Credit

Bloomberg Barclays Long Term Gov/Credit

-0.59 3.15 3.15 8.93 4.82 3.35 3.88

-1.11 3.37 3.37 9.82 5.17 3.54 4.14

2.89 8.20 8.20 13.23 5.82 3.64 3.83

-0.44 2.40 2.40 6.88 3.79 2.76 3.14

-2.95 6.21 6.21 19.32 9.68 5.98 8.07

1M 3M YTD 1Y 3Y 5Y 10Y

FIXED INCOME INDICES (%) Period Ending March 31, 2020

OPTION ADJUSTED SPREADS – BASIS POINTS

High Yield (Current = 882) Investment Grade (Current = 221)HY Average (553) IG Average (121)

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BENCHMARK RETURNS (3 TO 10 YEAR ANNUALIZED)

Commodity RecapOne of the few places to hide during the quarter was the traditional safe haven of gold. The commodity managed to rise +4.0% while other asset classes were experiencing steep declines. Over

the last year, gold has managed to appreciate +22.5%. The oil price war between Saudi Arabia and Russia resulted in sharply lower energy prices during the quarter. West Texas Intermediate

crude oil declined -66.5% while unleaded gasoline prices declined -40.1%. According to AAA, the national average price per gallon of unleaded gasoline dropped to $1.99 at the end of the quarter.

Source: Northern Trust

COMMODITY WEIGHT 1M 3M 6M 1Y 3Y 5Y 10Y

As with most capital markets, the foreign currency markets have been extremely volatile over the last month. Almost all of the volatility is related to the coronavirus impact and the response of the various Central Banks. The US Federal Reserve and the US Treasury Department have led the response, calling on key lessons learned from the post 9/11 response and

the 2008 – 2009 financial crisis response. The US dollar has been the prime beneficiary of investor sentiment over the last few weeks. In late March, the US dollar hit new 2 year highs against the euro but has weakened slightly since then. Major oil producing economies, like Canada, Mexico, Norway and others have seen their currency fall dramatically. We expect the US

dollar to weaken slightly once the impact of the coronavirus begins to abate, but volatility is likely as the coronavirus re-surfaces again during the summer and fall. The scope and pace of economic recovery from the coronavirus impact in various regions across the globe will largely drive currency levels through the fall.

Currency Corner by Michael O’Hare - SVP Foreign Exchange

The Federal government and the Federal Reserve Bank have responded to the coronavirus pandemic with unprecedented fiscal and monetary stimulus. As of this writing, the S&P 500 Index has bounced back over +20% from the low established on March 23 while credit spreads have declined somewhat from their recent peak levels. Still, the damage from this disease is likely to be significant. Globally, coronavirus cases are

well over two million and deaths greater than 170,000. The Federal government is indicating that social distancing is likely to be the norm through at least the beginning of May. Even after that, restarting the economy will not be without challenges. There could also be business failures, particularly of young unprofitable companies. Although it would not surprise us if the market goes on to test the March 2020 lows in the near term,

these are not the times to abandon properly aligned investment plans. Indeed, this is why we continue to favor a broadly diversified approach to investing with an emphasis on high quality equities and fixed income instruments.

The Berkshire Bank Wealth Management Team

2020 Outlook

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Banking products are provided by Berkshire Bank: Member FDIC. Berkshire Bank is a Massachusetts chartered bank. 04/20