Monthly Market Update- March 2020
This Update is coming a couple days early, spurred of course by the massive douse of downside volatility on Wall Street. We like it when volatility works on the upside, not so much this direction. Though we at KLR Wealth always feel it important to maintain close contact with all of you, our clients, it is unquestionably most important to do so, sooner than later, when prices sharply decline.
February marks a four month low
After floating merrily along what I call the ‘boozy haze’ of massive monetary accommodation to a cycle high on February 12 – up nearly 5% for the month – a fully diversified equity portfolio came crashing back to the joint realities of the coronavirus and the Presidential election cycle and now rest at nearly a four-month low. The damage was most pronounced in the final week of the month, indeed somewhat reminiscent of the third week of December, 2018, which of course was the culmination of a near-15% decline from the end of November. In fact, the 8.10% decline in the past four trading days represent the second-most severe four-day period in the history of the S&P 500, eclipsed only by a 9.24% drop in mid-October 1989. The causes of each are of course considerably different but there is no question that the ‘urgency’ of the selling has been substantial.
What caused February’s sudden decline?
Certainly the most significant factor in February’s sudden downside reversal was the fact that the coronavirus was not only not going away, but that it was accelerating not only in China but also across most other continents. Initial comparisons to the fairly benign global macroeconomic impacts of the 2003 SARS (also China-based) and of the U.S.’s own 2009 H1N1 (aka ‘swine flu’) episodes have largely been left in the dust, at least as we finish February…and for good reason. The GDP of China of 17 years ago was barely 10% of what it is now and was only beginning to make inroads into the global economic aggregate, and SARS was fairly quickly contained. Our swine flu, though very widespread, proved to be little more than a slightly-more-severe than usual version of the normal and annual influenza affliction. By some accounts, it’s still with us.
But this seems different.
China is now the world’s second largest economy and massively inter-twined macro-economically with virtually every developed and emerging nation. The Chinese response, though perhaps a little weak as the virus came into consciousness in mid-January, has been stunning. According to Gave-Kal Research, as much as half of China’s productive capacity was off-line in late February. Other countries, most notably South Korea and Italy over this past weekend, have acknowledged a significant impact. On Tuesday this week our own Center for Disease Control (CDC) warned of its expectation that it would soon become far more widespread in the U.S. – a matter of ‘when’, not ‘if’. Of course, there are words of assurance coming from the White House that the disease inside our borders will continue to be nearly totally contained – hopefully those will be realized.
Impact of the coronavirus similar to the tsunami in Japan?
A more appropriate analogy in terms of economic impact, as first expressed this morning by my friends at Ned Davis Research, might be to the tsunami in Japan in March, 2011, which hit with zero warning just as the world was beginning to emerge from the Great Financial Crisis of 2008-09. Though the tsunami’s destructive force was concentrated in of course a very small geographic area, that area happened to be a vital - actually irreplaceable at the time - cog in the world’s automobile supply chain, and it was a major factor in global semiconductor production. It took many months before normalcy was restored across both industries. There were other factors that affected global economic activity in 2011 – among them the Greek debacle in the spring and the downgrade of U.S. debt over the summer – but I will forever believe that the near-return to recessionary conditions that year would never have happened without that tsunami.
On the political front, how quickly perceptions have changed!
Senator Sanders’ near-win in Iowa and solid win in New Hampshire (we’ll get to Nevada in a sec) made him the clear front-runner. On February 12, this was regarded as a massive plus for the markets since Wall Street, at that precise moment, gave him basically zero chance of winning in November, guaranteeing a victory for the incumbent and his perceived growth friendly economic policies. I discussed this last month. However, with Sanders’ surge in Nevada – over-riding the conventional wisdom that his Medicare-for-All policy would be rejected by the highly Latino (and Culinary Union-attached) base – and rapidly rising poll positions in South Carolina and around all of the Super Tuesday states, the new perception is that he could blow past all current opposition and, on approach to the general, spur such an overwhelming voter turnout that he could very well take the White House. Never mind what will actually happen if he is elected, right now this is decidedly Wall Street’s least favorite outcome and, therefore from that point of view, one to be feared.
Some palpable, negative impact is likely on its way.
Frankly, everything else is just details right now. We do get important economic data releases on Friday and during all of next week. Enough time has elapsed since the inception of the virus such that there is likely to be some palpable negative impact across the board. Even the indicators which have already been reported can be at best described as a ’mixed bag’. On the one hand, with interest rates having dropped so low, the housing market continues to boom along, but on the other, manufacturing shows no sign of re-strengthening. Consumer confidence still remains elevated but has shown some early signs of fraying around the edges. The vast consensus on Wall Street is still that the economy will re-accelerate in Q2 and for the rest of 2020. But as the famous idiom goes – “I’m from Missouri and you have to show me” – before I really believe it.
Short-term, there is likely to be some modest relief. One month after the ten worst 4-day trading periods in history (as noted above, this is 2nd), six times the market has risen with an average gain of 2%. And at this morning’s opening we are indeed seeing a decent rebound. But I don’t see a vigorous return to the highs of two weeks ago. We are likely to see a number of ‘negative pre-announcements’ from high profile corporations, indicating that their sales and earnings will be below current forecasts. Combine that with the likely hit to the economic data and we are probably in for at best a very tepid month of March for portfolio performance.
Overconfidence breeds complacency.
So we stay resolutely under-weight our equity targets for long-term client investment portfolios. This didn’t feel quite so smart all of two weeks ago, with indexes at new all-time highs and virtually every pundit fully bulled-up and, in my opinion, way, way over-confident. One thing I have learned over now-near-40 years on Wall Street is that over-confidence breeds complacency, and complacency is never a good thing. This virus, plus the new political perception, demonstrates once again the validity one of my favorite metaphors. If you’re going to get hit by a bus, you never get hit by one you see. We’ve just gotten hit by two buses that yes, we might have seen, but chose to overlook. Not now.
It’s no time to make major portfolio allocation decisions.
That said, the environment of sudden downside reversals plus the potential recovery rebound, no matter of what creation, is no time to make major portfolio allocation decisions in either direction. With our equity underweight, we’ve already prepared for a market, and perhaps an economic ‘reboot’. When (not if) the dust settles, whether it be next week or next month or next quarter, we will then evaluate the then-prevailing context and make, or not make, another decision, but please have every confidence that we are paying very, very close attention.
We are always available for our clients. If you have questions or concerns, please reach out to one of your KLR Wealth Team Members at 888-557-8557 or email at firstname.lastname@example.org / email@example.com.
Published on: 02.26.20