February 28, 2020

Volatile Uncertainty

The week that just passed was unusual. I feel I can say that as I’ve been an active portfolio manager for almost thirty years and I may have seen nearly every market condition one could imagine. Not that this week’s market drop isn’t like other market corrections. Where this drop differs begins at the cause, namely this isn’t an economic or financial crisis, it’s a health crisis. And unless one is convinced that the coronavirus is already a crisis, as suggested by the unusual fact that the market drop occurred almost exclusively in one week, even that idea feeds the prevailing level of uncertainty. As of today, there is little known about the prevalence of the disease in spite of the increasing number of interpretive conclusions emanating from our current political body. And not exactly with comforting outcome.

The Markets
Another unusual outcome of the drop this week was the fact that the three primary indexes (Dow, S&P and Nasdaq) finished the week down from recent highs -14.1%, -12.9% and -12.9% respectively. This suggests two contributors, the first is there is widespread ETF selling, much from our algorithmic friends, and the second that technology, while feeling beat up, is holding its value against declines in more common household names such as Proctor & Gamble (PG). For now, the markets declines are also being met with incremental buying, on the back of comments by the Federal Reserve Board or statements of reassurance from companies such as Microsoft (MSFT) that the impact of the global aspect of the virus on the balance is inevitable but manageable. In the meantime, the next few months of economic data will bring a clearer picture on the economic impact of the virus and hopefully the virus itself will have a clearer picture as well.

The Economy
The fundamentals of the economy remain strong in the words of Fed chairperson Powell. Nonetheless he went on to suggest that lowering rates would be considered if the economy warranted it. In my opinion that is almost inevitable as the Unemployment data over the next few months data could very well show a steep, although perhaps temporary, decline in hiring. Keeping in mind that the temporary halt in hiring is not the same as firing employees. Likewise, the current vigor of the consumer as measured through sentiment and service indicators will be important to watch. At that time a better reason for the Fed to lower rates will present itself. As far as the virus is concerned, in my opinion, there is little to warrant a Fed ease as well, since it may have a positive effect on the broad indexes, but not necessarily a stable one. In short, more facts have to come out and that could go on for the foreseeable future.

External Events
Narcissism is alive and well, humility is around the corner. The political machine doesn’t have a virus yet and it’s hardly surprising, but also sobering. For now, it’s probably best to maintain a watchful eye over global economic events over political events if the outcome of the virus and its impact is ever to be gauged somehow.  Cash, and the increasing value of assets in the broad markets will continue to keep our interests while also serve as a welcome distraction.