Market Update - March 9, 2020
Baron Rothschild, an 18th century Brit once said, “The time to buy is when there’s blood in the streets, even if the blood is your own.” It is incredible how similar this 300 year-old quote is to the one I shared from Warren Buffet in my most recent update.
If only it were as easy as deciding when and how much blood needed to be in the streets prior to jumping into the pool. Ultimately, this current market feels a lot like one of those scenarios the Baron was alluding to.
Without getting into too much technical jargon, the US market in particular is experiencing a nearly 5 standard deviation event as I am penning this note to you. In plain English, math would suggest the type of move we are seeing in US indices has a probability of occurring of only roughly .00006%. To clarify, price action in today’s market is more of a random occurrence than anything that could actually be modeled using a normal distribution curve.
In order for something like this to occur, you need to have a series of unfortunate events to unfold in a very short period of time. Although you likely are abreast of current events, I will break down what is causing the panic selling we are seeing across global equity and commodity markets.
First, as discussed in the COVID-19 update, it is impossible to quantify the economic impact of this virus on global GDP. Since the last note was distributed, a lot has occurred. The rapid increase in cases in the EU (Italy specifically) and a substantial ramp in new cases here in the US has created serious questions about a global recession. Whether that occurs or not is impossible to predict based on the sheer number of unknowns surrounding the virus.
Next, and arguably more shocking to markets today was the bona fide oil war Russia and Saudi Arabia have engaged in over the weekend. While lower prices at the pump are pretty cool, the damage being done to American E&P companies is quite the opposite.
The only cure for low oil prices is even lower oil prices. The weakest companies will be exposed, and production will come offline as they are forced to liquidate assets or go bankrupt. This is exactly what all of OPEC + the Russians want to happen. From our perspective the most logical course of action is to improve the quality of our oil and gas exposure for individual stock clients and limit the overall exposure to energy in our diversified mutual fund portfolios. Fortunately, the latter has already occurred, and the former has been executed as of this morning.
While the aforementioned data is negative and pundits on TV are going to try to fear monger (it is their job!), I would like to point out the fact that our portfolios have been on the low end of their risk ranges since late last year. Our fixed income positions have done their job mitigating some downside risk, and traditional asset allocation is finally showing it still has merit. Additionally, the alternative investments found in the majority of our models have proven resilient and acted as a stabilizing force in your portfolios. Each bit of downside we can avoid results in less upside we have to recapture after markets stabilize.
For our individual stock portfolios, this volatility has provided an opportunity to increase exposure to companies with quality balance sheets and selectively transition to a few growth names that may uniquely benefit from this odd environment over the intermediate to long term.
Bear markets invariably end. How and when is a question I don’t necessarily have the answer to; however, history points to trading days similar to today (3/9/2020), as a catalyst for a bottoming process to occur. Volatility generally sticks around for a bit, but it often subsides as suddenly as it intensifies.
Over the next few days, we will see if history repeats itself this time around. Regardless of the short term outcome, our long term approach to investing affords us the resolve to remain invested and make the best of opportunities as they present themselves.
Please do not hesitate to reach out to our office to discuss what is happening in your specific portfolio.
Disclosures
Any opinions are those of Alexander Leonida, CFP®, CIMA® and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.