We find ourselves in unsettled times with many unanswered questions and uncertainties. Caution and a retreat to safety are natural responses, both for individuals and the financial markets.
On March 11th 2020, the World Health Organization announced that the COVID-19 viral disease, commonly referred to as the coronavirus, is now officially a pandemic. The first case of the virus was identified in China last December and has now spread to well over 100 countries. On March 13th President Trump signed an emergency declaration, unlocking certain government powers to deal with the public health challenge.
The human health impact is, of course, of highest concern, but the economic and financial consequences are also real and impossible to yet quantify. The beginning of March marked the 11th anniversary of the longest running stock bull market in history, and the S&P 500 and The Dow Jones Industrial Average (DJIA) both hit fresh record highs in February. However, as the global spread of COVID-19 accelerates, along with fear of its impact on productivity, trade, and growth, the markets have sharply reversed their courses. The DJIA, which officially crossed into bear market territory as defined by a decline of 20% from recent highs, did so in a record 19 sessions, far less than the average 136 trading days for prior bear markets, according to Dow Jones Market Data.
There is never a good time for a severe negative event to impact the economy, but at least domestically it arrived during a period of relative strength. Before the spread of the coronavirus, and the market sell-off it triggered, the U.S was enjoying record low levels of unemployment, a solid level of consumer confidence, and a widely-shared expectation that corporate profits would rebound after a sluggish 2019. In other words, the economy here is about as well-placed as it could be to weather a downturn, which, by its unforeseen nature will be of indeterminate length and severity.
Exacerbating market woes, Saudi Arabia recently and abruptly abandoned its Russian alliance that was limiting oil production and flooded the globe with cheap oil. The result was an immediate 30% pull back in the price of crude, followed by further falls in WTI prices to below $25 per barrel, representing a drop of over well over half from a recent January peak. This compounded the effects of already-reduced demand brought on by coronavirus impacts and one of the warmest winters on record. The energy sector is an important component of equity markets, and oil stocks dived, further feeding fears over the fragility of the global economy, and leading to more indiscriminate selling of securities in all sectors.
The issue is not just the shocks we are facing, but the swiftness and nature of responses from populations and their leadership. At home, the central bank has taken the most dramatic steps since the 2008 financial crisis to steady the U.S. economy. Since the beginning of March, the Federal Open Market Committee have announced two emergency interest rate cuts in the federal funds rate to bring it to a range of 0.00 – 0.25%.
The Fed has also restarted quantitative easing, where the central bank purchases government or other securities to increase money supply. These moves, along with others enacted and being contemplated, are designed to supply liquidity to the financial system and support cheap access to capital. For the first time in history, 30-year Treasury bonds traded at yields below 1% and the 10-year Treasury traded at below 0.5%, according to data from Reuters.
Already, in the U.S. alone, Congress has approved an $8.3 billion emergency spending bill to combat the virus spread, and the administration is working to put into action bipartisan agreements on additional significant measures to both dampen negative economic impacts for individuals and corporations, as well as stimulate the economy. Restrictions on the movement of people, locally and globally, are further aggravating economic woes, although will hopefully help stem contagion. Markets are now indicating a higher probability of recession, evidenced by lower Treasury bond yields, higher interest rates demanded on lower quality bonds, and the plummeting of stock prices.
According to Benjamin Graham, the father of value investing, if you are an investor, “price fluctuations have only one significant meaning; an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” Although much has shifted in an extremely short period, exacerbated for some industries, our investment philosophy has always focused on high quality companies trading at reasonable valuations. While we certainly participate in these blanket market downturns, we hope such a discipline translates to level of safety and robustness in the long term compared to more speculative plays. Bear in mind also, that as automated and program-driven trading play larger roles, market moves are often amplified and can become temporarily disconnected from rational valuations.
With news and outlooks changing daily, even hourly, nobody is in a position to predict when the stock market will stem its decline but further volatility is a near-certainty. Nevertheless, we remain bullish on the future of the United States, our economy and the markets. In times of acute uncertainty, it is human nature to think in shorter time frames, but the stock market is best measured in periods far longer than days, weeks or months. The resiliency of the U.S. economy is like none other in the world. As Warren Buffett once said, “It’s never paid to bet against America. We come through things, but it’s not always a smooth ride.” The nation, and markets, have emerged resilient through crises, even in recent memory, and shall weather this one also.
As we all face this new unknown and practice caution in our day-to-day activities, we hope you and our communities stay as safe and well as possible, and we that continue to look out for each other.