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Q1 2020: An Unexpected Shock to the System

“There are known knowns.  There are things we know we know.  We also know there are known unknowns.  That is to say, we know there are some things we do not know.  But there are also unknown unknowns, the ones we don't know we don't know.”  

—Donald Rumsfeld, former Secretary of Defense

Overview

The first quarter was both, a mix of a known unknown (a virus, which while this latest outbreak was a potential unknown, we do know that a virus can rear up and strike unexpectedly like swine flu and SARS have done in the past) and an unknown unknown (the impact and speed of a virus spreading around the globe) wreaking untold havoc on the global economy.  For further clarification regarding the quote above, Donald Rumsfeld was not the person to first discuss an “unknown unknown” or as some also call a Black Swan event.  Rumsfeld's famous quote is commonly cited as growing out of work done by two American psychologists in the 1950s.  More recently, significant events and how they relate to economics and society were discussed extensively by Nassim Taleb in his now-famous book The Black Swan.  For clarification, some points of discussion related to this topic should be made as they can frame how we look at the current crisis.

 

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2020 Market Selloff, S&P 500 Dives 20% in 15 Days

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? 

 

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Equity Markets Defy Recession Worries

“The problem with experts is they do not know, what they do not know.”
- Nassim Taleb- respected financial market commentator and author

Overview

2019 proved to be a very good year for investors. This is in contrast to the almost constant stories in the media warning of an immanent recession, which would spell doom for the equity markets. It was also a year that saw many, many potentially very negative events overlooked on the way to new market highs. This again shows us very plainly that we have to shut out the excessive noise (to some extent) and focus on the fundamentals. Currently fundamentals are extremely strong, with low unemployment and the economy continuing to confound the “experts”. The U.S. continues to shine as a bright spot in the developed economies of the world.

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