The outbreak of the Corona Virus creates unintended consequences.
First, we have to mention that we are virtually in all cash due to selling equities across all client portfolios before this market dive.
Where are we (the market) now? The S&P 500 has been halted as I write this commentary. What does this mean? The S&P 500 has "circuit breakers" built in to stop trading when the index falls more than 7% in one day. At 6:40 A.M. on Monday, March 9th, the market is not trading due to this massive one-day dive. The stock market has fallen almost 20% in 15 days, which is the largest and quickest correction since 1929 (an ominous year for stocks). Trading has resumed, but the market continues to decline.
Where are we (client portfolios) in relation to the stock market? This is the crucial question, as what the market is doing is significant, but how accounts are performing in this environment is of paramount importance. As mentioned in previous emails, we went to a virtually "all cash" position at the end of January. So, we have to take a victory lap at this point and stress to clients that we have to avoid this massive market downdraft. Again, we have to emphasize that we have no stocks in client portfolios, so we have not experienced declines due to the recent market selloff.
What are the indicators telling us about the outlook from here?
First, some background, eleven years ago, financial markets hit their lows after the financial crisis. So we have had a very long run with equity markets notching a long record run of gains. Or, another way to look at this is that a "correction" was overdue. But, I believe this is not a typical "correction," as we now have multiple factors converging to push down the equity markets. To stress this point, by historical measures, a correction was overdue, and now we have a massive demand and supply shock that will hit the global economy. So, what might have been a "normal" correction will soon devolve into what you see today due to harmful external factors outside of the financial system. Specifically, this catalyst is the Corona Virus, which now hitting equity markets that is being accelerated by a price war in the oil market. The equity market did not need these converging factors, accelerating a slide in equity prices.
So back to, where do we go from here? Again some more background is needed. Regardless of what the "professionals" say, financial markets are prone to excess and panics in the short term. Yes, in the long-term, financial markets usually get it right in terms of asset prices and economic growth, but in the short-term, fear and greed can overtake fundamentals. This is where we are right now, as people also realize how equity exposure in their portfolios can wreak havoc on your net worth. The large stock brokerage companies are rolling out the talking heads on Bloomberg and CNBC and stressing "invest for the long-term," as we are experiencing a market route. To add insult to injury, one strategist suggested, "now is the time to reassess your risk tolerance." This is a day late and many dollars short of saying this now. The time to assess risk tolerance is when times are good, you have significant gains in your stock positions, and there is NOT a major selloff happening in the equity market. Also, many active managers will be put to the test to see if they were really "active" and were able to avoid this recent market decline.
As we consider ourselves an active manager, the proof is in the results. We have avoided this major market meltdown and want to stress; this is when the value proposition in the protection of the principal shows through. In essence, the client's buying power has gone up by about 20%. But in reality, we believe there will be many, many good buys, and in reality buying power in client accounts will be about 30% higher due to many excellent companies selling off by a staggering amount. Will we get the other side 100%, right? Will we "catch the bottom" when we start buying? That is impossible to know, but we will certainly do our best to take advantage of the current dislocations to benefit our clients. We look at this as an opportunity and will be deploying capital when the dust settles.