No doubt, what we’re currently experiencing is unprecedented. I told my family we should all be journaling about the experience, the news headlines and how they made us feel, what the talking heads were saying on TV, and the overall mood of the country. We’ll avoid the topics of conspiracy theories, politics, and the blame game. All roads lead to where we are and we need to be thoughtful and deliberate about how we move forward from here.
In my opinion, two key issues created the perfect storm we’ve experienced in the financial markets. The Corona virus coupled with a collapse in oil prices. It also did not help that the market was a bit ahead of itself and these issues simply provided the motivation for a needed correction.
I am certainly NOT an infectious disease specialist, but I have taken a keen interest in reading and following the data that is provided on various websites and discussion boards. Being a numbers geek, I have picked up on some encouraging trends and I suspect this data will support a conclusion that the virus is becoming more contained. Clearly, it originated in China. The number of new cases being reported there is slowing rapidly and the rate of those recovering is growing at about the same pace. The global mortality rate was being reported around 4%, with Italy skewing the numbers to the high side. The mortality rate in the US has been much lower and is slowing over the past week, which may be partially due to the fact that the relative number of new cases has grown due to the increased availability of testing. My prayer is that these trends are not anomalies. It seems logical that the number of new cases will get worse before it gets better and the corresponding mortality rate will decline.
Our country has taken aggressive action to stem the spread of this historic pandemic but there will be some short term damage to the economy. The fiscal stimulus being thrown into the economy is huge and even a bit creative. On March 13th, because of the oil war, the President ordered the Secretary of Energy to purchase a large quantity of oil at bargain prices to add to the country’s strategic oil reserve. So we’re buying insanely cheap oil with money we borrowed (probably from China). And because the crisis forced the Fed to cut interest rates to near zero, this effectively gives us the opportunity to refinance our national debt at a substantially reduced rate. Interest rate cuts, central bank bond buying, family leave packages, etc., are going to infuse cash and provide badly needed liquidity for the economy.
Financially, we’ve taken a hit. And while it’s been a setback, the damage is not permanent. I should take a moment to mention our team has experienced no panic from our clients. While there has been some concern, everyone has reacted sanely and rationally. In contrast, the average market participant has not. Apply the phenomenon of folks rushing out and buying up all the toilet paper as an analogy to the market sell off. Do either of these seem rational to you? We have experienced the indiscriminate selling of all asset classes, including gold, as an impetuous to raising cash.
Technical indicators we normally use as hints about where the market should experience support and resistance have been disregarded because of the market fear. We take this to mean many investors are selling just because prices are falling with little due diligence and no regard to price or value. Only today have we begun to hear discussion again about the crisis’ effect on corporate earnings and their practical relationship to value. While this is encouraging, I only hope fear doesn’t turn into greed so quickly that it becomes unhealthy. We are reviewing the balance sheets and financial ratios of all our holdings in the portfolios we manage to access our confidence in their quality and integrity as we begin the expected recovery.
I’ll leave you with this, we are not yet out of the woods. You can expect more volatility and perhaps a little more panic. It is critical to remember that EVERY share of stock being SOLD, is being BOUGHT by somebody else who thinks it undervalued! It’s a perfect time for each of us to review our priorities, objectives, our spending habits and risk tolerance. We are blessed to work for a client base that trusts us and values our opinion. Thanks to all of you for your courage and patience. It always pays to keep your emotions in check and your wits about you. Try to take advantage of, and enjoy the additional time with your family. Continue to take counsel of your faith instead of your fears.