It was just two weeks ago the markets were looking at all time highs and consensus was building about an economic recovery continuing based on higher earnings forecasts. We don’t often experience black swan events but the coronavirus outbreak, by definition, could be possibly considered the black swan event of 2020. It is early in the outbreak, but markets are seemingly reacting as if some level of economic downturn or recession is on the horizon. We won’t know for sure what the toll will be on the economy or financial markets until later this year. We can draw from several historical virus pandemics to get an idea of what happened to economic activity, but every situation and recovery is different. Here are our quick thoughts on what has transpired so far and what our team at Coral Gables Trust is doing about it.
It didn’t take long for the Federal Reserve to jump into action. They unanimously voted to lower the Fed Funds rate by 50 bps (basis points) to a range of 1.00% - 1.25%. Markets were pricing in a 100% probability that they were going to act on their scheduled meeting in mid-March, but the Fed thought it would be proactive to show they are on top of the issue and act accordingly to get ahead of any economic slowdown. The administration also passed an emergency spending bill to combat the virus outbreak. Governments worldwide are engaging in similar responses with more to follow. Market response so far has been underwhelming but once more clarity presents itself, we expect this to change.
China is slowly coming online again, and we expect anything related to the global supply chain derived from China to gradually come back over the coming weeks and months. Major countries and corporations around the world are being vigilant by canceling major events and deferring major gatherings until a later date. All this is bound to have an impact on demand and the economy. We expect more announcements like these in the coming weeks which could produce more short-term volatility.
We have had an incredible amount of volatility in the last two weeks where the DOW going up or down 1,000 points has become the norm. We must keep in mind that 2019 was a very strong year and complacency was starting to set in. Markets were off to a decent start in 2020. This of course has unraveled as markets are now trying to aggressively price in an economic downturn of some magnitude from the virus. As we write, the U.S. domestic market is about 18% off the highs of mid-February. The bond market has been anything but boring with the 10-year treasury now dropping to below 0.50% as investors run to safety.
Coral Gables Trust and our Clients
It has never been a good idea to panic and react impulsively to market volatility. Our client portfolios are built to provide for their long-term financial circumstances and have some element of stress testing involved. We constantly screen and approve the strongest bottom-up fundamentally driven strategies in all our portfolio mandates to ensure we have solid relative downside performance over difficult market periods. We are recommending current clients hold steady with their allocations as their long-term goals and circumstances continue to drive the portfolio allocation decision. Our strategy for our new clients is one of caution but opportunity. We advocate for a goals driven portfolio with a long-term focus that is carefully constructed to mitigate as much volatility as possible. With new portfolios funded with cash, we are employing a multi-month dollar-cost average approach to capitalize on the volatility of the markets. As long-term investors, revisiting individual goals and objectives is paramount in order to keep emotion far away from the allocation decision that drives our investor portfolios.