Market Summary
The worst one day decline in U.S. stocks since December of 2008 shook financial markets yesterday. Fear gripped market participants as the number of new coronavirus cases accelerated outside of China and a simmering dispute between Saudi Arabia and Russia on oil production cuts boiled over into an all-out price war, sending crude oil prices down by over 25%. For the day, the S&P 500 lost -7.6% with the energy sector being the hardest hit with a -20.0% decline, while the Dow and Nasdaq Composite were down -7.8% and -7.3%, respectively. Foreign equities didn’t fare much better as the MSCI All Country World ex-U.S. index tumbled -6.3%. Meanwhile, Treasury yields fell to record lows as investors dove into anything that seems safe, sending the 10-year Treasury price up and the yield to as low as 0.40%, before recovering to 0.5%. Year-to-date, the S&P 500 is down almost -15% as of Monday’s close, and the U.S. 10-year Treasury yield has fallen over -1.4% from 1.92% to start the year. However, both U.S. equities and bond yields are rebounding upward in Tuesday’s early trading on reports that the Trump administration is considering a temporary payroll tax cut and other fiscal relief measures.
To date, the coronavirus has infected more than 114,000 worldwide, prompting quarantines that continue to snarl supply chains. This virus (and even more the fears) will significantly hurt consumer spending, the travel and hotel business, and industrial production in the short-term, but we believe that the majority of the damage will be temporary. We don’t see the lasting long-term damage created by the financial crisis of 2008. That crisis ended with the market hitting bottom on March 9, 2009, exactly 11 years ago, but it mired the financial stability of many economies for much longer. Although this virus is serious for those with challenged health, most healthier patients recover just as they do from the flu. We should not overestimate OR underestimate this virus.
We expect that the COVID-19 fears will get worse before they get better and that stock market volatility may continue near-term as a result. The potential for a recession in Europe has increased dramatically. We also expect that the significant public reaction here in the U.S. alongside reduced international demand for goods and services will slow the U.S. economy down temporarily. There are some sectors (transportation, restaurants, hospitality, etc.) that will suffer a loss of revenue that they won’t get back, but most other sectors that see a drop in demand should regain much of the lost sales in future quarters and will look back on all this as just a blip. But weaker companies with excessive leverage, especially in the oil and gas industry if the oil price war is dragged out, may experience financial difficulties with some even being driven into bankruptcy. Our investment team focuses on filtering out companies with weak balance sheets and poor competitive positions, but we will continue to monitor any knock-on effects of rising bankruptcy that would affect the overall economic picture, such as employment.
Falling gas prices at the pump, alongside the interest rate cuts from the Federal Reserve and the considered fiscal stimulus from the White House, may help ease the economic burden of coronavirus disruption for some U.S. consumers and businesses, but they will not solve the problem of cancelled travel and events, school and work closures, and disrupted supply lines, which will need to play out. However, the precautions currently being taken may help slow and contain the spread as people begin doing what they should have done all along (wash their hands, stay home when they’re sick, etc.).
We would remind clients and investors that are worried that the primary reason that the average investor underperforms the average mutual fund is because of mistakes in trying to time the market, including selling when times get tough and waiting for the all-clear to buy back in, which is often too late. On behalf of our clients, we will continue to be long term investors that focus on buying high-quality companies that have weathered many storms (and health scares) before. As always, we will keep you informed of changes in the economic and market environments and the implications for you portfolio. Please do not hesitate to reach out with questions and concerns.
