Last week was obviously a terrible week in the stock market due to fears of the corona virus, with the S&P500 down roughly -9.2% in US$ terms on the week and -8.5% year-to-date (YTD). For some context, this puts the U.S. market back where it was in October, which doesn’t seem that bad when you look at it like that.
Our Pension and Growth models are down roughly -3% and -5% YTD, so we have been able to blunt the downturn somewhat. As many of you know, coming out of 2018 we bulked up on alternative funds in the models just for times such as these and we’re happy we did.
Of course, equity market volatility is not a new thing, and, given the fact that we sold some stocks ahead of the volatility on February 21st, it will likely cause for some great buying opportunities when things settle down.
Furthermore, some experts suggest the virus may have pulled forward a trend that was going to happen anyway: “We could see a longer-term acceleration in enabling information worker productivity outside the traditional office environment,” Citi Research analyst Walter Pritchard wrote on Thursday. Companies like Zoom Video, Slack, OKTA, and many more are increasingly allowing workers to access corporate tools remotely.
The point is that this market noise could very well serve as a transition to the next leg higher, much as every other major correction in the last ten years.
The “hidden” rally on Friday
When markets freefall for a few days you learn to expect a bounce back that recoups somewhere around 50% of the previous fall. On Thursday the market tried to stage a “relief rally” but failed. This set up Friday’s brutal open, where the market was down around -4% at the low. Then the rally finally took hold: by day-end it had turned the S&P’s -4% into a run-of-the-mill 0.8% loss. More still, the tech-heavy NASDAQ exchange finished in positive territory on Friday! Expect the rally to carry on for a few more days this week—possibly explosively—before the market finally catches its breath.
Our expectation remains that it’ll stay a “noisy” market that makes fluctuations in the short-term unpredictable. Even the deluge of bad news last week precipitated the talk of the Federal Reserve and a possible interest rate cut, (among other policy tools at its disposal).
We have learned over the years that whoever coined the phrase “Don’t fight the Fed” was a wise individual. We’ve seen various reports that corona virus growth rates have slowed. Still, given historical incidence, odds are that the virus becomes much less of a perceived threat in the coming weeks which in turn could set us up for a crazy liquidity-driven rally later this year.
As we often conclude, the future of the market is uncertain and confusion around the coronovirus and its effect on the global economy is ever-present. We will continue to monitor our key market and economic indicators and adapt portfolios based on the prevailing trends. Clients should know that we are currently conservatively positioned in this volatile time and are prepared to take action as information comes available to us.
Download PDF – Market Minute – February 29 2020