We are living in an uncertain environment from both a health and an investment perspective. At this point we are unfortunately not in a position to determine the course that the coronavirus will take in upcoming months.
We do, however, feel qualified to comment in a general fashion on how the virus is likely to influence financial markets and to articulate our present investment approach and what factors will guide our decisions moving forward.
In our many years of experience, volatile markets tend to generate two types of responses:
- Liquidate stock holdings ("Let's go to cash")
- Increase the stock ratio of the portfolio ("Buy on the dip")
Despite these normal inclinations, the best approach is to remember long-term objectives and to maintain a disciplined process taking into account new information as it arises.
Quick refresh of where we were before the virus:
- The S&P 500 increased over 30% in 2019 and continued the upward trend in early 2020, reaching a new high as recently as February 19, 2020, representing a YTD return of approximately 5% using that day's closing price.
- Positive stock market action reflected increased confidence around economic growth based on 1) easing trade tensions/Brexit progress, 2) an uptick in global economic activity, 3) a strong U.S. consumer (the bedrock of this cycle), and 4) significant global government stimulus (monetary and fiscal).
Where markets are currently:
- The S&P 500 is now over 20% below its February high. It is now technically in bear market territory.
- Markets are pricing in a coronavirus-driven recession, a situation compounded by an oil price war between Saudi Arabia and Russia.
- Bond yields are in unchartered territory with the entire yield curve moving below 1%, and 10-year U.S. Treasury yields dipping below 0.5% for the first time ever.
- For context, the S&P 500 experienced three 8–9% down days in 2008 and on August 8, 2011, experienced a 7% down day (post downgrade of U.S. government credit rating).
The path forward:
- The path forward from here will not be linear, as bottoming out is a process. It is not unusual to see big drops, a bounce back, a re-test of the previous market lows.
- From an economic perspective, the next six (6) months will be challenging. Economic activity will slow meaningfully as consumers and businesses will be less able/willing to spend money.
- There may be a "technical recession," where the U.S. economy (GDP) may contract for two quarters. If the virus abates, a recovery is likely given a rebound in consumer spending. This presupposes continued supportive fiscal and monetary policy by governments around the world.
- The critical questions are 1) how fast any potential recovery materializes and 2) the strength of that recovery. The timing of the recovery is a function of when the virus abates and the strength of the recovery is a function of underlying fundamentals.
- Positive tailwinds include the amount of both fiscal and monetary stimuli around the globe, lower gas prices, lower mortgage rates, and pent-up demand. Negative headwinds include complications from the energy price war (U.S. shale producers, bank loans, credit spreads) and overall global economic trajectories.
How are we managing our client portfolios?
- We continue to monitor, update, and revise our thinking and scenarios as necessary.
- The best strategy is to not be reactionary, but maintain an objective, analytical, and long-term oriented focus. It is dangerous to change our strategy mid-course without new information driving that change.
- We continue to invest client portfolios in above-average quality assets that help to weather these types of storms. We continue to be comfortable with how our client portfolios are positioned.
- Volatile times often create long-term opportunities. We are always curating our shopping lists to find investments that we feel are attractive and have long-term value. We are definitely keeping our pencils sharpened in this environment as well.
We acknowledge these are uncertain times for an investor. We hope this is helpful.