Today and throughout the week, the U.S. stock market has been down on news of a “community spread” case of the Coronavirus in California. As public health officials have warned, the coronavirus is now in the U.S. and likely to spread. Through today’s close, the S&P 500 Index is down -12% from its recent February 19 high, back to the same level it was October 18. The latest news regarding the Coronavirus outbreak will likely continue to rattle markets. While we do anticipate the virus will have a significant effect on short-term global economic growth, we also believe the effects will be transient and have minor long-term impact.
The three headwinds currently facing the market are:
- Democratic primary elections
Market Volatility Expectations
Investors should expect the Coronavirus-induced market volatility to continue for the foreseeable future. While the consensus seems to be calling for a v-shaped recovery post-virus, there will inevitably be some permanent demand destruction. For example, many conferences and vacation plans will be canceled and never rescheduled.
A second factor weighing on the market is Bernie Sanders, who is now the clear front-runner for the democratic presidential nomination. It’s relatively safe to say that most people (consensus) do not view Sanders’ policies as “market-friendly,” regardless of personal opinions surrounding his candidacy.
The third and, in our view, the most important headwind is overall equity valuations. The S&P 500 was trading at an elevated Forward PE compared to historical averages. Prior to the recent sell-off the market was overbought, up 18% since October 8th, and due for a pause. While the S&P 500 is now cheaper than it was a week ago, it remains at an elevated PE level.
Despite the headwinds, investors should consider what the famed investor, Warren Buffet, recently posed on CNBC, ‘Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’ We agree with Warren Buffet that the answer is a resounding, “No.”
What Can We Look Forward To?
There are three significant positive factors that should provide support to global growth and equity markets, specifically lower interest rates, accommodative central banks, and solid corporate earnings.
The U.S. 10-year Treasury Yield is now at historic lows. Yesterday, the 10-year yield closed at 1.31 percent, and the yield decline continued today. While the decline in rates is due to the expected global growth slowdown, the lower rates should provide an additional boost to the U.S. housing market, which was already accelerating. Just this morning, U.S. pending home sales were up 5.2 percent month-over-month in January—much better than the expected three percent, according to the National Association of Realtors. As a reminder, Housing is one sector than can have a significant impact on the overall economy.
Second, the virus is likely to keep global monetary policy extremely loose with central banks inclined to provide further liquidity in times of stress. The Fed is projected to cut rates 2.5 times this year due to the expected global slowdown. We believe liquidity provided by central banks has been a significant contributor to stock market advances since the Great Financial Crisis.
Finally, U.S. corporations are doing well. Most corporations have reported better-than-expected earnings this quarter. This is crucial as corporate earnings drive stock market returns over the long-term.
Here’s What You Need to Do
Investors can take several steps during times like this. We suggest that investors should be grateful for their diversified allocation, take a long-term approach to investment decisions, and prepare for new investment opportunities.
No one knows how long the volatility will last. It may endure another day, another week, or another several months. However, we do know as long-term investors markets can be stressful and experience periodic volatility. We prepare accordingly by diversifying investment assets. These are the times we are thankful for portfolios that are not just invested in stocks. Few, if any, Curi Capital clients have all their assets entirely invested in U.S. stocks, and most clients typically hold a meaningful percentage in fixed income, which has fared well relative to stocks since the stock market peaked. All core fixed income managers in discretionary strategies are positive since the market peak through last night as rates have declined. This event also serves as a great reminder that you don’t want your money to be solely invested in publicly-traded securities. We would not anticipate non-liquid strategies, such as triple net lease real estate, to be affected by recent events. Our long-term goal is to provide clients with non-correlated investments that reduce overall portfolio risk without sacrificing returns. Ultimately, this is driven by first understanding and implementing a plan to help you meet your long-term financial goals.
Looking back, we do believe this volatility will prove to be a transient event. While the short-term term news is negative and likely to get worse, the more lasting tailwinds of low interest rates, accommodative central banks, and corporate earnings will have more lasting effects. We will continue to monitor our discretionary strategies and believe we are well-positioned for the recent decline. In addition, we will look for opportunities to deploy excess cash once we identify dislocations in the market that we can get excited about.
Please reach out to a member of the Curi Capital team at 984-202-2800 should you have any questions about your portfolio, are unsure your portfolio is setup to whether market volatility or, more importantly, to achieve your long-term goals.
Disclaimer: Past performance is not an indication of future results. The opinions expressed herein are subject to change without notice. This is not a recommendation to buy or sell any specific security. Curi Capital is not a tax or legal advisor. All decisions regarding the tax and legal implications of your investments should be made in consultation with your independent tax and/or legal advisor.
 Core Fixed Income managers referenced include iShares 0-5 Year Investment Grade Corporate Bond (SLQD), iShares Aaa-A rated corporate Bond (QLTA), Schwab US Aggregate Bond (SCHZ), DoubleLine Total Return (DBLTX), and Wells Fargo Municipal Bond fund (WMBIX). Please note this is not a recommendation to buy or sell any specific security and past performance is not an indication of future results.
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