LAST WEEK ON WALL STREET
There was no place to hide as the stock market suffered its worst week since the 2008 financial crisis as fears over the coronavirus and its negative impact on the global economy rocked investor sentiment to its core.
The Dow Jones Industrial Average lost a total of 3,938.67 points last week, posting its biggest weekly point loss in history. The big board ended the week in correction territory, down more than 12%. The S&P 500 was also down 11.5% on the horrendous week to finish below the 3,000 level at 2,954.22. The tech-heavy NASDAQ lost 10.5% on the week and finally ended at 8,567.37.
After a grueling week of record setting losses, we take solace in drawing February 2020 to its end.
Without understating the human tragedy or underestimating the economic global dynamics of attempts to contain this virus, we all seek answers in hopes of determining how far this correction must run before we feel things are really under control. Where do we go from here?
Let's attempt to answer this question by examining the facts:
Coronavirus case count to date: over 85,000 - Death count: over 2,900 (67 deaths in 51 countries outside China) (Source: WHO Situation Report #39 2-28-20)
For the first time since the outset of symptoms of the first identified case on December 8th, there have been more new cases reported from countries outside of China than from inside. (Source: WHO Situation Report #37 2/25/20)
The CDC says influenza has caused up to 57,300 deaths and sickened up to 41.3 million people. (Source: CDC April 2019)
The World Health Organization has not declared the coronavirus a pandemic.
Granted, the situation is changing by the hour, but when you look at the facts and not the "breaking news," there's room for thought and rational analysis to act cautiously and prudently. The human tragedy is undeniable, but the economic impact is far from a given global economic meltdown.
We are facing a problem and we don't know how long the problem will last or its true impact on global economics. Fear is an emotion and not the proper condition to make sound decisions. Granted the pullback we saw last week is hard to swallow, but how far down and for how long is the real question. Is it over? Probably not. Tomorrow's Super Tuesday could give the market a jolt of its own.
We're not talking political theory here - it's economic theory. The "far left" is the antithesis of the "far right" and a Bernie Sanders platform represents a big change in economic policy from where we are today. It's not about the person, the party or which side is right, but the true axiom of market behavior - Wall Street does not like change. Time and again we've discussed volatility as a basic principle of investing. With the VIX over 40 (its highest level in two years), we're not calling for an end today.
What about the Fed?
Federal Reserve Chairman Jerome Powell addressed the situation on Friday and indicated that they are willing to further support the economy if necessary. He stated that the U.S. economy remains strong while recognizing the potential threat from the coronavirus could change things. Wall Street is expecting a 50-basis point rate cut in March. Two weeks ago, the odds of that happening stood below 10%. (Source: CME Group)
Needless to say, this downturn is a result of contagion fears and a lot of unknown consequences to our global supply lines. And rightly so, but to deny the capacity of this nation to overcome a virus and recover production and consumption is a denial of our history and our ability to recover from adversity.
Obviously, we don't have a crystal ball and we should be prepared for more coronavirus uncertainty in the short-term. We are focused on how markets will respond over the long-term. We endeavor to keep our strategy simple - where risk is monitored within a defined range and to own HIGH-QUALITY companies with strong balance sheets and cash reserves.
Earnings reports will take a back seat to the psychology and temperament of investors as we collectively process news about the contagion. Here are a few companies whose forecasts may say more about where they're headed then their Q4 numbers: Target, Kohl's, Costco, Zoom Video and Kroger.
The global economic calendar will likely take a back seat to fears over the spread of the virus. Super Tuesday primaries will surely have an impact tomorrow. The Beige Book on Wednesday and the jobs report on Friday are big data points, but they won't be able to tell us much in regard to where we're headed.
Below is the cover of a book I’m reading, and I suggest as an investor you read it too. The central theme of the book is that the tendency of humans to develop a herd mentality leads to individuals in the herd to act and react to various stimuli. The reactions are very similar and predictable, and this “madness” leads to a downward spiral with undesirable effects. The book highlights several stories from history of various manias that took place. There are lessons to be learned from them in the present day.
I have one final anecdote someone shared with me the other day. I think it’s fitting given the current circumstances.
"This guy's walking down the street when he falls in a hole.
The walls are so steep he can't get out.
A doctor passes by and the guy shouts up, 'Hey you. Can you help me out?'
The doctor writes a prescription, throws it down the hole and moves on.
Then a priest comes along and the guy shouts up, 'Father, I'm down in
this hole can you help me out?' The priest writes out a prayer,
throws it down the hole and moves on.
Then a friend walks by, 'Hey Joe, it's me - can you help me out?'
And the friend jumps in the hole. Our guy says, 'Are you stupid?
Now we're both down here.'
The friend says, 'Yeah, but I've been down here before and I know the way out.'"
For the past 23 years that we have been managing money, writing market commentaries and publishing newsletters - "we have been here before" - in 2000, 2001, 2002, 2008 and briefly in 2011, 2015 and 2018. We know the way out. As a wonderful client of mine who is no longer with us used to say, “This too shall pass.”
As we process the current events across the world and here at home, feel free to reach out with any questions about how we're positioned for 2020 and beyond.
Warm regards,
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March 02, 2020
