Special Market Update
By now most investors are aware that through Thursday’s market close, the S&P 500 is down 10.75% for the week, this puts the broad index in negative territory for 2020. Most of the selloff is blamed on the increased risk of the coronavirus; so far more than 80,000 people have been infected in about 40 countries and it has killed more than 2,700 people.[i]
This epidemic is certainly an unfortunate event and economists, analysts, and corporate executives are attempting to wrap their arms around the situation to determine the outcome it will have on the economy and corporate profits. FactSet reported that about 40% of the companies have cited the coronavirus in their earnings transcripts, and of those companies that have mentioned it, one third are not sure how it will affect their revenues or bottom line.[ii]
The last time we experienced a big outbreak was in 2002-2003 with the SARS virus. Between December 2002-April 2003, the S&P 500 dropped 8.3%, only to recover 18.6% over the next six months. Although SARS is different from today’s epidemic, it is still helpful to see how the markets reacted. Robert Luna, Surevest CEO & Chief Investment Strategist, was on national media last week and said he would not be surprised to see a selloff of 10% from recent highs. That is where we are today, in correction territory and now below the 200-day simple moving average on the S&P 500. In general, markets were due for this healthy pullback and the coronavirus provided the catalyst.
We don’t think investors should panic. Volatility will certainly persist for the next few months on the coronavirus fears, but also because it is an election year in the U.S. and the Democratic primaries are not over. We think world GDP will be lower over the next couple of quarters and aggregate corporate profits will decrease over the same period, but taking a full market cycle perspective of five to seven years, we expect things to continue pushing forward and markets to be higher.
A buy and hold approach or indexing is not the best strategy in this environment. Market volatility will present opportunities and taking advantage of it will certainly pay off. With the large drop this week, the Surevest Investment Committee repositioned certain investments and implemented certain procedures to put our clients in a better position.
In a market selloff, some stocks are hurt more than others, and sometimes certain companies are unjustifiably pushed much lower than the fundamentals would suggest. This provides an opportunity to buy more of those stocks at very attractive prices, such as the blue-chip names we found that were punished unfairly. We have also taken this opportunity to rebalance our Dividend Grower Portfolio, buying more of these high-quality income producing companies. With interest rates at record low, we believe this group of companies provides an extremely compelling entry point for investors.
Over the last couple of months, we’ve had clients that wanted to invest larger sums of money into the markets and rather than invest it all at once, we put them on a dynamic dollar cost average program. Unlike a traditional dollar cost average that invest the same dollar amount every month, our dynamic approach allowed us to accelerate a couple of months of buying during this selloff. This will ultimately help put more money in our client’s pockets.
Last night at the CFA Los Angeles Wealth Management League Dr. Robert C. Merton, professor at MIT and Nobel Prize laureate, spoke and answered questions about recent market events. Dr. Merton made a great distinction between a selloff and a panic; he said both are very similar in that the markets drop in a short period of time, but in a panic the market fundamentals structurally change and in a selloff they remain intact. To determine if this week’s market drop is a panic or selloff we must ask, have the market fundamentals structurally changed from this week to the prior week? We don’t think so, and believe the markets will continue to function as they have over the last 90 years. However, the markets are reacting as if it is a panic, which will provide opportunities to capitalize on market mispricing.
Our clients have a sound investment strategy that is underpinned by a rigorous financial planning process. Therefore, the best course of action is to stick to the plan. We will continue to monitor the environment for potential threats and make appropriate adjustments, like what we discussed in this letter, to put our clients in a better financial position. Reach out to your financial advisor with questions or if you would like to discuss your specific portfolio.
