The Good: Thus far, we have felt the recent correction in the equity markets has been orderly and relatively normal. We have enjoyed the rising markets, seemingly relentless until it wasn’t.
We have been witnessing some incredibly positive economic numbers, the most recent being the Jobs Report Friday of last week. By almost every metric, we are in a surging and positive economic environment in the United States. This results in a positive trend for earnings and has been reflected in the markets. We remain very positive on the U.S. Economy!
The Bad: The excuse du jour for the above correction has been the Coronavirus. In our view, the reaction to the Coronavirus is beginning to have some impact on portions of the economy, such as travel, event cancellations, etc. Based on review of the actual numbers, we don’t believe this will be a sustained issue. Relative to other health scares we have had, while serious, Coronavirus seems already to be subsiding in China and South Korea. It has also garnered significant focus globally, and in our opinion will be under control relatively quickly.
The Ugly: Over the weekend, Russia and Saudi Arabia parted company regarding oil production cuts. Oil has been weak, and it appears Saudi Arabia is once again attempting market share dominance by threatening to flood the world in oil. This resulted in oil prices collapsing another 30% over the weekend, after oil began declining in January of this year from the low 60’s to the close Friday of 41.28. It is now trading in the low 30’s, having hit a low of 27.34 this morning.
The bad and ugly are potentially negative developments, and the question is whether this leads to a real crisis? Up until this weekend, we thought the probability of a crisis hitting the U.S. was quite low. However depending on how the above oil situation works out, there are now risks that have presented themselves:
- The U.S. corporate bond market – there is a substantial amount of High-Yield “Junk” debt, probably around 15%. A reasonable percentage of this is associated with energy, such as U.S. Shale Energy Bonds.
- Up until this weekend, the market was going down largely due to economic fallout from the Coronavirus. Today the market is reacting to the oil collapse, which could trigger a major credit event similar to 2008.
- If there is a major credit event as noted above, this could indeed end the bull market and create a crisis similar to 2008.
We are monitoring the situation closely, and trying to determine if this is going to result in a crisis, or is it the buying opportunity of a lifetime? In our view, it’s too soon to tell.
- Lower oil prices will be a MAJOR benefit to consumers. This means less money at the pump, and more money available for spending on other items (consumer spending is still 70% of the U.S. economy).
- Interest rates are at historic lows. This results in lower mortgage costs, car loans, etc. Again, a MAJOR benefit to consumers, and beneficial to the economy. We are already seeing a spike in mortgage refinancing activity.
- This pullback in the stock market will clean out a lot of the froth that we’ve experienced of late. Assuming it doesn’t result in a crisis, this will help in stabilizing the financial system longer term.
- While never pleasant, we have witnessed real While counter intuitive, this is when market bottoms occur, and reversals happen. Selling becomes exhausted, and a bottom occurs.
- If this is a market bottom and we begin a new bull run later this year, you’ll be grateful you didn’t become a panic seller.
The situation is very dynamic, with many moving parts. Our clients know we stick to having proper balance in their portfolios, which has served us well over a long period of time. If you haven’t reviewed your portfolios regarding equity balance, etc. we encourage you to do so.
Bottom Line: Now is NOT the time to panic! Now is the time to maintain discipline, have proper balance in your portfolio, and keep a close eye on the situation. Let us know if we can help you with a portfolio tune-up!