Much of what we wrote earlier this week still holds true today, but here are the latest developments to our investment outlook given the week’s events.
The market is clearly repricing risk and more importantly reassessing growth, both economically and globally, as well as the underlying effect to company earnings. It’s important to revisit the fundamentals of asset valuation. Global capital values are established by future economic profits; are they growing or contracting. A company consistently growing earnings will get rewarded through multiple expansion as investors are willing to pay more for that consistent earnings growth. The unknown with COVID-19 right now is at what pace does it spread over the globe, the mortality rate, how it disrupts supply chains, and ultimately the global consumer.
Some companies will be clear winners; the first to market with a vaccine, companies who are not reliant on brick and mortar spaces to connect with their consumers, and those service companies that are based in the cloud. I for one will be spending the weekend avoiding people and streaming movies! Analysts are currently lowering both global growth expectations, specifically looking at China and tangentially Europe, as well as profit growth for companies. As investors, we must ask ourselves – is global growth permanently impaired? Will every company make zero dollars in 2020? Or even the next? In the past, we’ve noted that investment returns have been “pulled forward” from future years, specifically years such as 2017 and 2019 (+21.83% and +31.49% respectively). The market tends to overshoot both on the upside and downside.
To be clear, this week’s bout of volatility has been historic. U.S. treasury bonds have hit new record lows. The 30-year U.S. treasury turned into a 10-year while the 10-year turned into a 2-year. Long duration assets continue to disappear. The S&P 500 saw its fastest 10% correction from its peak, needing only 6 trading sessions to reverse course. For the Dow Jones Industrial Average index, from 1992 through 2019, on an average, out of 252 trading days in a year, there are 192 days with a daily percent change of less than 1%, 45 days between 1% and 2%, 10 days with greater than 2%, 3 days greater than 3%, 1 day greater than 4%, and 1 day greater than 5%. Better said, on average the Dow sees about 5 days a year where it moves +/-3% in a day. We’ve had a year’s worth of volatility just this week. Investors are now pricing in a 100% chance of a rate cut at the Fed’s March meeting, with a 44% chance of one rate cut and a 56% chance of two. Futures are fully pricing in three cuts for 2020, and odds of potentially a fourth cut. All this after just twelve business days ago domestic equity markets touched new record highs.
We remain diligent in monitoring current market events, specifically the spread of COVID-19, for any data that may change the odds of our base case scenario of a slowly growing global economy. As always, we appreciate your confidence in us. Please don’t hesitate to reach out to your wealth advisor for questions.