There will be books and movie scripts written about what we are witnessing right now. This is truly unprecedented in its global scale and swiftness as the virus infiltrates its way into communities around the world. We have witnessed not one, but two black swans in less than 30 days. COVID-19 and an oil price war amongst OPEC+ members have roiled global markets this week. The one-two punch has resulted in a demand shock that has halted every aspect of our daily living. School closures, travel bans, social distancing…the list goes on. The 11-year bull market official came to a crashing end on March 11th, 2020. People are confused and worried about their jobs, health and savings. We would be foolish to say that this event hasn’t impacted the economy enough to cause a recession. By definition a recession is two consecutive quarters of negative economic growth. The U.S. is a service based economy with 70% of total economic output from consumption. The market has already priced in a global recession.
It is important to remember that good companies and stocks aren’t immune to the overall market declines; however, we are long-term believers in the companies we invest in. We are believers in their cash flows, balance sheets and growth characteristics. We have taken proactive steps to move out of companies that are feeling heightened levels of stress (energy and travel/entertainment related stocks). More importantly, portfolio diversification is crucial to absorb the steep declines in global stock markets. Yet, diversification does not ensure a profit or guard against losses. High quality investment grade bonds and cash have been welcome components of our clients’ portfolios. We have avoided the “income” traps such as high yield bonds and preferred stocks. This is a welcome reminder that stretching for yield is often detrimental and comes with higher levels of risk
We do not know where the markets finally bottom. History reminds us that it is usually when panic reaches a fever pitch. Is that today, tomorrow or three months from now? No one knows. The market decline of the past three weeks is similar in magnitude to 1987 and 2008. Average bear market declines since 1950 fall around 20-25% from peak levels. 1987 had a 35% decline with no recession. 2008 had a 56% decline with a severe recession. We are currently right around 25%. While past performance is no guarantee of future results, markets eventually recovered and went on to trade at fresh new highs in every example.
What we are watching:
- Elevated put/call ratios reflect stress and fear in the options market. We are approaching 2 puts for every 1 call which is rare.
- 10 year Treasury yields: Although it doesn’t feel like treasury yields have moved higher with stocks trading to new lows, the 10 year Treasury bottomed on March 9th around 0.4% and is currently trading at 0.7%. Take it with a grain of salt.
- Capitulation usually ends with the best performers getting thrown out with the bathwater. Safety trades such as REITs and Utilities are also experiencing huge levels of volatility and price declines.
Please be safe by practicing common sense. We thank you for your continued trust and support. Please feel free to call us if you would like to discuss in further detail.
***Diversification does not ensure a profit or guard against losses and past performance is no guarantee of future results.