Economic & Financial Markets Outlook- Corona Virus Shuts Down US Economy As Stocks Slump! (Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
In March, the Dow Jones Industrial Average dropped 22.69%, the S&P 500 retreated 21.07%, and the NASDAQ fell18.39 %. During the first quarter, the Dow lost 26.61%, the S&P 500 gave up 23.53%, and the NASDAQ dripped 17.97%, With the ongoing realization of the danger of the Corona Virus, state governments across the United States shut down economic activities in March. Nearly 3.3 million workers filing for unemployment last week, a number nearly 500% more than the prior record number of 695,000 in 1982. I give the specific total for a sense of the relative enormity of the damage to the economy by the illness. The key issues now revolve around the virus and how it proceeds over the next six months. The effectiveness of the various branches of the U.S. government and how the health care system is able to contain, control, and limit its impact will determine how quickly the economy restarts.
There are clearly a wide range of estimates regarding how much time it will take to get a handle on the spread. The range could be anywhere from 2 months all the way to a few years, and your guess is as good as mine, and possibly as good as the epidemiologists. Like stock analysts, the projections rely on inputs and assumptions, all which are based on specific actions that are taken. If we assume an estimate of mid summer, the next important question becomes how long will it take for employment numbers to return to levels that somewhat resemble what they looked like over the last few years? Our citizens need to stay healthy and alive, without question, but the economic reality of unemployment potentially approaching 25% or more is also creating tremendous anxiety. Uncertainty about income and day to day living expenses and job losses are also creating massive issues across the country in many different areas. The US economy will eventually reopen and slowly recover, but the current reality is a twenty trillion dollar economy has been turned off. Lawmakers cannot just press a button and have things return to pre-Corona days.
Realistically, we should have the expectation it will take a good nine to twelve months or longer for economic activity to approach a level consistent with historical averages. As an investors, this is an interesting time because many companies in service related industries have seen their equity prices driven down dramatically. Most have challenges because of operating shut downs. The important work of thinking about the best businesses one can find, understanding their business model, and having a sober and realistic appraisal of what kind of profits the company will earn over the next two to three years is how I am thinking about the current equity market climate.
Global Economic & Financial Markets Outlook-Corona Virus Infects Global Markets! (All country index data provided by countryeconomy.com, March 31, 2020.)
World equity markets suffered through a difficult first quarter as most major stock indexes fell anywhere from 20-30% during the last three months. Investors saw what took place in China and Italy and came to the conclusion it foreshadowed a shutdown across the globe and sold. In an interconnected globe where debt levels have reached nearly an aggregated $250 trillion dollars, any kind of shock to the financial system can, and did, cause margin calls from stressed leveraged entities. For equity investors, the primary concern is staying healthy while the world tries to find a solution for the Corona virus pandemic. Over time, once it is under control, economies will open back up. Businesses can then go about rebuilding and recovering from a difficult situation. Let’s take a quick trip around the globe to get a better sense of the losses in the first quarter.
In Europe, the FTSE in England was off 24.80%, Germany’s DAX fell 25.01%, and France’s CAC lost 26.46%. In Asia, Japan’s Nikkei dropped 23.63%, China’s Shanghai Index lost 10.35%, the Hang Seng retreated 18.11%, Taiwan’s TWSE dropped lower by 19.48%, and India’s NIFY fell 29.27%. Moving further east and south, Australia’s ASX gave up 15.42%, Indonesia’s JCI melted 30.79%, and New Zealand’s NZX oozed 13.63%. Not pretty, not pretty at all.
Looking forward, the primary concern again revolves around how long will it take for the world to effectively treat the Corona Virus to prevent further loss of life. For those of us at home, we clearly owe a great deal of gratitude to the medical professionals who risk their lives treating patients. Economically, the world will begin recovering once the virus issue is handled but there is no way of knowing how long this will take, or even worse, whether there is a second outbreak.
The Art of Contrarian Thinking- Considering What You Want More Exposure to and Why! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
With the first quarter posting the worst equity returns since the Great Depression, prices of all businesses have come down a great deal. The vast majority of investors have limited amounts of capital. When there are opportunities available to acquire a piece of a business at a lower price, the important question to consider is why am I buying this company versus others in the industry? Equally important is considering what future prospects the company has given the highly stressed economic environment. Nearly all enterprises are facing huge disruptions in their normal operations. In a vast majority of cases, the company may be starting from a questionable consumer spending profile because of the massive unemployment figures the country and globe is now facing. Many industries in the service area are seeing 80-90% reductions in traffic volumes (airlines, hotels, casinos, restaurants) or even complete closures of all their locations. With such uncertainty in so many businesses, you need a very logical business premise as a reason to invest. If you make an assumption that it will take a long time for the economy to recover, any business that has a debt laden balance sheet with immediate or impending payments due has to be looked at quite closely. As an example, if you look at the energy space, specifically shale exploration, many in this industry are under tremendous pressure. The basic premise for investing in energy revolves around the idea that oil and gas is a mandatory product for society to function. Right now there is both a demand shock and a supply war (Russia, Saudi Arabia) which makes it doubly tough on any producer. Still, oil and gas will be needed for the next twenty years or more. Asking yourself why you want to own specific companies and knowing the advantages they have relative to their competitors helps an equity owner by having solid reasons for having it in your portfolio. I hope this help your investing during the difficult time we are in.
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(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)