Updated: Mar 15
Market Update - March 23, 2020
In between changing diapers on my two-week-old baby and trying to prevent my two year old from banging on my keyboard, I’ve had a lot of time to think. I admit I am burning the candle at both ends, but I feel more invigorated than ever to be in this industry. While most asset managers are making bold claims about v-shaped bottoms and pounding the table on the strength of the underlying economy, I would like to take a few minutes of your weekend to share some sobering facts, and more importantly, what we are doing with our strategy moving forward.
Many of the most diverse and robust cities in America are now devoid of traffic and starting to see the air pollution clear from their skies. If the heat maps in the major metro areas in southeast Asia are any indicator, we could have clear blue skies across America within 2 weeks! While that is a wonderful thought, the expense to small businesses and certain sectors of the economy will have reverberations for years to come.
Fortunately, our government seems to be taking the virus seriously, and my previous missives regarding COVID-19’s death rate in the developed world are proving to be rooted in fact. The economic threat of the virus may outweigh the human one. I certainly don’t intend to downplay those of us suffering through loss or sickness; rather, I want to point out the challenges that economy will face when the virus is long gone. The remote workforce will be around for a long time. Commercial real estate will likely be affected by this fact. The restaurant industry will undoubtedly consolidate, and only the strongest will survive. Hotels and resorts will also go through some consolidation and will result in some bankruptcies. The same goes for the airlines! While government bailouts will help stem some of this pain, one fact will become glaringly obvious: Only the strongest companies will survive.
Even though the virus has been a powerful catalyst negatively impacting global markets, nobody is talking about the cracks that were developing in the economy prior to the virus gripping the minds of everyone with a TV. From a rate of change perspective, we saw peaks in GDP, hiring, Capex spending, and consumer confidence in Q3 and Q4 of 2019. Generally, markets have a final run into the “euphoria” phase of price appreciation following said peaks in data. As is our standard operating procedure, our managed accounts were not positioned for a euphoric rise in risk assets. Rather, we believed it was prudent for investors to maintain a normal weighting to stocks, and keep appropriate exposure to alternatives and short duration bonds. As a foundational investing principle, we believe in relying on data to dictate positioning rather than blindly following the herd mentality.
While we certainly did not see the oil price war coming, we believe companies with strong balance sheets and vast liquidity provide value and opportunity to investors. Over the last few weeks, in the face of historic volatility, investors should consider reducing overall systematic risk and removing nearly all exposure to the most virus challenged sectors. As timing the market is nearly impossible, and the overall depth of the economic downturn is in question, we intend to remain invested and suggest managing risk by shifting cash allocation where advisable.
As one of my favorite analysts, Keith McCullough, puts it, “Risk happens slowly, and then all at once.” At no time in recent memory has this rung so true. I intend to discuss our positioning and how we plan to deal with ongoing volatility in our quarterly update video. Please be on the lookout for this video and continued timely blogs over the next few weeks.
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.