Stocks continued their plunge this week, with the Coronavirus officially ending the 11 year bull market in equities, with all major indices down over 20% from their peak. What has been a spectacular run ended in dramatic fashion, with the selloff the fastest in history. News of the spreading contagion and a lack of response from governments around the world caused panic for investors, with fears that the secondary effects from the disease could lead to a sharp slowdown in economic growth, supply side dislocations, and cratering profits for companies. Potentially worse still, if short term borrowing is not made available to small businesses which are seeing a drop in demand, they may begin laying off workers, leading to a virtuous feedback loop of negativity for the economy. Adding to the concerns, oil producers Saudi Arabia and Russia could not come to an agreement on production levels, unleashing oil price declines of over 30% in one day alone. The sharp drop and ongoing volatility in prices has compounded problems for market participants, who are desperately trying to keep up with a rapidly evolving situation. The combination of supply side hits from shuttered production facilities around the world, along with a drop in demand from a concerned public are hitting businesses everywhere. Alarmingly, the US government has been very slow to act in curtailing the crisis, with little support thus far announced in the form of tax cuts or fiscal spending, which are desperately needed to decrease the length and severity of the current crisis. With profit warnings from many companies already announced and analysts cutting estimates for equities, a race to the bottom is on for markets, and we believe there is still some, but not much, more pain ahead for investors before a floor is reached.
We have taken decisive action in portfolios over the last several weeks, and are waiting with large amounts of cash and high quality bonds in the portfolio to take advantage of low prices for risk assets when we feel a compelling turnaround is in order. Clarity around fiscal policy from governments around the world to help alleviate the pandemic, as well as properly being able to gauge the economic impact of the disruption will be necessary before equities should be added to meaningfully. Patience on both sides, in not selling out entirely and also not jumping in completely, are prudent with the amounts of volatility we are facing. Ultimately, we strongly believe that a significant rebound will occur later in the year, that could push equities back into positive territory. Perhaps the most positive outcome of this event is the washout that occurs when recessions strike, a healthy reset for markets that had recently tested euphoric highs leading into the drop. The beginning of a new bull market is likely right around the corner in our view, which will bring with it great opportunities for those who focus on fundamentals and allocate their portfolios appropriately for their risk tolerance and investment objectives. While times like these are unnerving for even the most seasoned investor, remember that we have been here before, and that markets have always rewarded those who maintain a long-term perspective. Most importantly, for our clients we have run scenarios such as this one repeatedly in preparation for an inevitable stock market drop, and cautioned against chasing returns in what had looked like a never-ending rise higher. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.