First and foremost, we hope this newsletter finds everyone adopting good practices, such as washing hands frequently and social distancing, for personal safety and well-being. We’re not telling you anything that you haven’t already heard but most importantly, heed the advice of your doctor and medical community.
Social distancing01 will slow the community spread of the Coronavirus, referred to as COVID-19, and hopefully avoid overwhelming the health care system. However, an unfortunate side effect will likely be to prolong the process that will further stress families and small businesses. An insidious trait of this particular virus is that an individual can be infected for many days without exhibiting any symptoms, thus enabling the spread of the virus. Several existing drugs are being considered for testing against COVID-19 while vaccines are developed, which take time!
The effects of this pandemic may last several quarters and likely accelerate the transition to online commerce, which benefits some companies while hurting others. Central banks around the world, are flooding the markets with liquidity02 to support their respective economies and stave off steeper recessions. The FED seems willing to backstop the economy and financial system03 by dropping interest rates to virtually zero through emergency meetings. Fortunately, the financial system is in much better shape than it was prior to the 2008 market downturn. Congress and the Treasury Department are in the process to putting together an aid package for families, small business and sectors hardest hit by the call for a halt to daily activities, gatherings and travel.
A good summary of equity market performance during past viral outbreaks can be found in an article titled “How the stock market has performed during past viral outbreaks” written by Mark DeCambre on the Marketwatch website04. Historically, Wall Street’s reaction to epidemics has usually been of short duration but differ in depth. In particular, there is an excellent graph of documented epidemics annotated on the historic valuation of the S&P 50005. Not all Bear markets result from economic or political policy but some from exogenous events that abruptly alter sentiment.
Unfortunately, world-wide equity markets were priced for perfection. The Longest Bull market in history came to an abrupt end06 with the S&P 500 cascading lower and down roughly 30% from the Mid-February peak because of indiscriminate selling. The Coronavirus was an unexpected exogenous event causing volatility to the downside exacerbated by Margins Calls07. Also, the markets were at lofty valuations at the onset of this virus, which contributed to the precipitous drop.
Just because the market is down doesn't necessarily make it cheap yet. Market valuation will depend on future corporate earnings, which are somewhat in question because of the busted global supply chains08. This selloff is NOT a result of cessation of demand but a fear of supply disruption, lower corporate profits and possible recession. The demand, in theory, will hopefully still exist when the market returns to some level of normalcy.
Corporations clearly need to further diversify their supply chains between countries and continents while possibly bringing some back domestically. Companies can’t build products without an adequate workforce and ALL of the parts to complete said products with many assembly parts being imported. Corporations had already begun this process because of escalating tariffs and hopefully this will expedite that process.
The best defense for corrections like this is a well-diversified portfolio rebalanced periodically, which helps ensure proper diversification and asset allocation pursuant to a client’s investment needs, objectives and risk tolerance.09 Equities have declined while high-quality bonds, such as Treasuries, have risen in value but NOT nearly enough to offset the equity losses. This is NOT a time to make rash decisions. Let this correction run its course while making plans on how best to proceed when things settle down.
Again, the most important thing is to treat this pandemic seriously and stay safe. This too will pass albeit somewhat painfully as recession fears grow. Because this happened during a period of economic growth, if the Administration acts swiftly and decisively, this may be held to a shallower recession. If you have any concerns because of the market volatility and corresponding correction, a member of the Iron Belt Partners team will gladly discuss any concerns with you. Our contact information is:
Lindsay M. Turchetta lturchetta@wradvisors.com (724) 493-9473
John D. Martin JDMartin@wradvisors.com (412) 925-7031
Working as a team in an effort to better serve our clients!
01 Source: “Social Distancing – what to do and NOT to do” on Fox.com by Austin Williams
02 Source: “Central Banks have flooded global markets with liquidity” on ROCHFORD-group.com
03 Source: “FED to create emergency backstop for Commercial paper” on AmericanBanker.com by Hannah Lang
04 Source: “How the stock market has behaved during past viral outbreaks” on MarketWatch.com by Mark DeCambre
05TheS&P 500 is an unmanaged index that cannot be directly invested into. Past performance does not guarantee future results.
06 Source: “11-year Bull Market finally ends” on WallSt.com by Lee Jackson
07 Source: “Margin Call could worsen Coronavirus sell” on Barrons.com by Al Root
08 Source: “How Coronavirus could impact global supply chain” on hrb.org by Parrie Haren and David Simchi-Levi
09 Rebalancing, diversification and asset allocation strategies do not assure a profit or protect against loss in declining markets. They are methods used to help manage portfolio risk. Also, rebalancing may have fees and tax consequences so please consult with a tax and financial advisor prior to making financial decisions. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss.
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, as of 3/27/2020. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal. Past performance is not indicative of future
results.
The S&P 500 index referenced herein is unmanaged and cannot be directly invested into.
Diversification and asset allocation are investment strategies that can help manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.
(03/20)