We want to take a moment to address the extreme selling that has transpired in the markets throughout the last few days and weeks. It’s too early to say if yesterday’s capitulation-style selling signaled a market bottom, and it is too early to predict what the resulting short-term and long-term damage to the domestic and global economies will be. Our view is that most industries and sectors will recover from the coronavirus sell-off, while the industries that have been most directly impacted by the virus – hospitality, transportation, and tourism – will face a prolonged recovery. The timing and degree of recovery is first and foremost dependent on the spread and subsequent containment of the virus.
Once containment is in place, we expect a strong snap-back rally for the companies that have been indirectly affected by the virus through the indiscriminate selling across all asset classes. It is important to reiterate that it’s too early to make a prediction on when this will occur. The recovery for investments in industries directly impacted by the virus (e.g., hospitality, transportation, tourism) will be heavily dependent on individual businesses’ access to capital. On Wednesday, the Federal Reserve rolled out its plan to ease the stress on the capital markets caused by the uncertainty surrounding the spread of the virus in addition to the collapse in oil prices, which is a needed first step that will likely be modified in the coming weeks. We expect Congress to release a fiscal stimulus plan over the next few days that will be targeted towards aiding the industries directly impacted by the virus. This plan may also include tax breaks designed to enhance consumer spending throughout the remainder of the year.
We have received many inquiries regarding the unprecedented velocity of this sell-off. We attribute the latter to the increased use of sophisticated high-frequency trading programs that have become the norm for large institutions and hedge funds. This type of computer-based trading is programmed to identify trends and exploit them. In simpler terms, the buy programs drive prices higher in an up-market, and the opposite is true when the markets reverse course and a clear trend to the downside is identified. Over the years, we have noticed the high-frequency trading programs accelerate the downside moves in the market – in this case, erasing 15 months of gains in a matter of weeks – similar to the sell-off we witnessed in the fourth quarter of 2018. As a silver-lining, indiscriminate selling results in opportunities for investors with excess cash on the sidelines that can be allocated to risk asset classes.
Lastly, although it may feel eerily similar to 2008, the coronavirus crisis is different from the historic downturn of 2007-09. While the toll COVID-19 will ultimately take on our domestic and global economies remains uncertain, the economic disorder spurred by the outbreak will most likely not be as severe and long-term as the repercussions experienced from the 2008 financial crisis. As we mentioned in our market update last week, this acute sell-off is welcomed over a “death by a thousand cuts” downward spiral that results from years of deeply rooted weak spots in the economy like we saw with the 2008 recession. What we are experiencing now is a pandemic external to the economy – the issue is not ingrained within the economy itself – and fundamentals such as unemployment, growth, and inflation were strong with positive trajectories before the coronavirus panic hit. That being said, the economy, consumers, and businesses are better positioned to withstand this external blow, bolstered by the fundamentals’ framework, and bounce back, although we remain unsure what the time frame may be.
As we continue to navigate the day-to-day headwinds, we are not discounting the gravity of this situation, and we are profoundly aware of the seriousness surrounding the virus and the impact such unknowns have on our everyday lives. Please be safe and take daily precautions to protect yourself, your loved ones, and your surrounding communities.
As always, we are available to answer your questions and provide our input and guidance during this challenging period.