February 28, 2020
I think it goes without saying, this has been a turbulent week for global markets. While our prayers go out to those affected by COVID-19, our focus has been on your accounts. A key driver for our investment strategy has always been data. We do not act on “gut-feelings” or have emotional responses to volatile market conditions. With that being said, I would like to share some more information on what is happening to the global economy and why a relatively benign virus is causing so much volatility.
COVID-19 was initially identified as a potential epidemic in the beginning of December of last year. For reasons only known to the Chinese government, it was not really made public until January 20th. Of course, there are a number of reasons why this was held under wraps; however, it is impossible to ignore the fact China likely did not want to be seen as having lost control of the situation. When it became evident there was no way to contain the virus without quarantining an entire province, was the moment it had to be made public.
While there was an initial shock to global markets toward the end of January, the related supply chain constraints and ramifications on consumption and manufacturing were being downplayed by the Chinese government. As more companies began to shed light on the manufacturing issues and potential impact on earnings, China was forced to be slightly more transparent in their reporting of cases as well as actions they were taking to prevent further spread. While it is highly likely they are still underreporting both new cases and deaths, it is of paramount importance to point out their outdated and generally unprepared healthcare infrastructure. Moreover, the vast majority of deaths are attributed to the elderly and already sick people in very impoverished areas.
This does not mean the virus cannot spread in more developed parts of the world; rather, I am simply pointing out the superior healthcare available in most first world countries is resulting in over 50% fewer deaths and a much slower growth rate in new cases, once the virus has been identified. (CDC)
The most meaningful risk to global markets is the misinformation coming from Chinese manufacturers. At present, they are claiming factories are opening and workers are returning to their posts. While this is partly true, there remains an internal struggle with getting people back to work and providing the necessary components to deliver finished products. Due to the strict travel rules associated with the quarantine zones and the general fear on mainland China, transporting goods and components within the country has been challenging. For the few finished goods ready for export, departure from ports has proven nearly impossible in some instances. This will undoubtedly have a negative impact on global growth, but each previous pandemic has historically resulted in a reacceleration in growth once it has been contained. While there are no guarantees that history will repeat itself, it often does.
While all of this seems like bad news, it is ultimately just news. Rest assured we are continuing to monitor the situation and focusing our time and energy on identifying opportunities for investment and beginning to tax-loss harvest in taxable accounts.
This current environment reminds me of one of my favorite quotes from Warren Buffet. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Please don’t hesitate to reach out us if you have any questions at all.
Disclosures
Any opinions are those of Alexander Leonida 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.