An unpredictable or unforeseen event, typically one with extreme consequences.
The market sell-off of the past few weeks, sparked mainly by the Corona Virus, has tested the most disciplined of investors’ resolve to stay the course. We have been following the latest developments about the Virus to ensure we are doing our part to ensure the safety of our clients and employees. Of course, we are also monitoring market response to this Black Swan event to ensure our strategies continue to make sense. Rather than trying to rehash news reports or offer some novel advice about the Virus, instead we thought it useful to put the current environment in perspective.
The sell-off has been fast and violent. On February 19, only fifteen trading days ago, the S&P 500 hit an all time high. As of this writing, the index is off over -26% from recent highs. Diversified client portfolios have held up far better than the indices, as holdings in high quality fixed income and alternatives have offset the steep losses in stocks. As you know, we follow a quantitative discipline that guides our buy and sell decisions – and we continue to have conviction in our process for the core of our portfolios. With that said, the abrupt and violent nature of the sell-off will likely provide opportunities due to market dislocations that we are preparing to take advantage of.
The current environment reminds us most of the Crash of October 1987. The economic backdrop at that time was generally strong, much like now. By April, six months after the roughly 28% drop, the market had rallied back 20%. We don’t know what will happen this time, or how much further things might fall, but we do believe the comparison is relevant.
Compare our situation now to the Financial Crisis of ’07-’08. It is not an exaggeration to say the US banking system was a few days away from failing…that bears repeating, the banking system was failing! From the collapse of Lehman Brothers to the bottom was just over a 30% decline. The real estate market was in an historic bubble and derivatives worsened the problems. To compare the Corona Virus to the Financial Crisis seems far-fetched. To be clear, there will absolutely be significant economic fall-out. Corporate earnings are likely to be very weak and we think it is likely that this will push the US economy into a recession. However, the nature of this “market event” is that it is temporary. Central bankers around the globe are acutely tuned in to what is happening and have indicated they will provide what ever means is necessary to get markets and economies through this. Many economists believe we will enter a recession in the next few months but by the end of the year the economy is likely to be growing again.
We continue to be proactive in our outreach to clients. If you are feeling particularly unsettled, please do not hesitate to call. If you are feeling like you want to take advantage of these lower prices, don’t hesitate to call.
As always, we will stay disciplined to our long-term process while attempting to tactically take advantage of opportunities.
Stay well!
Todd, Jason & Rachel
