March 2020 Economic Update

March 2020 Economic Update

The major news outlets love the superlatives so you will hear true statements such as “worst week since 2008…”  “Biggest single day point decline for the Dow in history . . .”  “Largest dollar value of stocks ever traded in a single day . . .”  (Friday $986 trillion). All of these are meant to grab your attention and cause fear and consternation.

Late last week the S&P 500 has reversed its fortunes for the year completely and broke through its 200-day moving average indicating there may be further to go on the downside. The price action would seem to be nearly entirely caused by Coronavirus fears. I am no doctor or expert in this field but certainly when supply lines are interrupted the impact is negative to the overall economy. More on this below. The good news is that aside from the headlines on the virus the general corporate earnings and broad economic numbers remain relatively healthy, however some revenue estimates are now being withdrawn as uncertainty continues. As we have mentioned in previous updates, pullbacks during the year are common and expected. The year of 2019 was an anomaly to the upside.

• Coronavirus Update

• Do Fundamentals Matter?

• Where is the Fed?

Coronavirus Update

The rapid increase in the number of cases of coronavirus and the latest confirmed case in California of someone who had not traveled outside the U.S. continues to pull the markets down into the mire of uncertainty. Supply disruptions and slowing interstate travel has the potential to derail earnings expectations across many industries. Some companies have already withdrawn their earnings estimates further adding to market uncertainty. The downward movement may not be done just yet, however, and as always, we recommend that the long-term view be maintained. We suggest it is unwise to make any sudden moves in a long-term investment portfolio. Quite the contrary, history has shown that in times of quick downward moves the long-term investor who stands steady or even adds to positions in good quality

companies and sectors tend to come out ahead. Events like this “Black Swan” event bring out the folks who are bearish on the market and give them short term credibility after being wrong for many years or months. We do not wish to downplay the seriousness of the situation but purely from an investment point of view we are looking for a bounce once the Coronavirus fear winds down and we see some significant opportunities for investment now that we have traded down from the highs.

Do Fundamentals Matter?

When a “Black Swan” or unusual and for the most part, unpredictable, event happens in the market we often hear the question; Do Fundamentals Matter? The answer, from my thirty years of experience in the markets is “YES” in the long term, “NOT REALLY” in the short term.  In the short term, markets can stay irrational longer than I can stay solvent.  It takes an understanding of the psychology of the market, the herd mentality as well as a solid understanding of fundamental and objective reasoning to succeed long term as an investor.

I have made many mistakes during my career on both sides of this proverbial fence. My rational objective mind tells me the numbers should always hold up and I used to invest purely quantitatively. I have learned through the school of hard knocks that the market is made up of billions of emotionally driven people however, and by and large these people make emotional decisions in every aspect of their lives. They buy the product with the best packaging rather than the best quality; they buy the product that brings them the best feeling rather than the one that would benefit them most. I admit I have done and still do the same thing regularly.  This is why the fundamentals matter but must be balanced with a full understanding of human psychology.

As a case in point, current economic numbers, with the exception of a predictable decline in consumer confidence this past week, were relatively positive, yet the market traded down on fear and uncertainty.  

Where is the Fed?

The Fed has acted quickly in recent months to assist the market in its rise although this is certainly not its mandate. Even a fast-acting Fed does not generally make major decisions based on a week of downward movement in the stock market especially one driven so obviously by a single unfortunate event. However, as we have seen this morning the Fed has once again announced a 50 bps cut to stem the tide. This may signal to the market that the government and Fed are also very worried about the impact of the virus on the economy and as such we could see the stock market not benefit as much from this cut.

This rate cut again raises the issue of what to do about generating income for those who need it during retirement or to fund other needs. As we often mention to our clients traditional fixed income is unlikely to perform as it once did not only in terms of generating income but also in the way it guards against downside risk. We are always open to having a conversation regarding the way the market has changed and how it may impact your personal portfolio. Please reach out to us with any questions.

I talk about the value of keeping a balance view of the fundamentals and market psychology in my recently published book:  Build a Life Not a PortfolioA Guide to Your Financial Future Based on Your Personal Values which you can find here or schedule a meeting with us to receive your free copy Here