Y H & C Investments Monthly Review: March 2020- Edition 140
US. Economic & Financial Markets Outlook- Corona Virus Scare Slams U.S. Markets- How Much It Impacts The U.S. Economy Is the Key Issue!(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 February, the Dow Jones Industrial Average fell 10.07%, the S&P 500 fell 8.41%, and the NASDAQ dropped 6.38%. The outbreak of the Corona Virus19 in China and it’s spread across the globe has caused fears of a global economic contraction. With 15 confirmed cases in the United States, the 10% drop in equity markets reflects an acceptance of a yet to be seen dramatic impact on U.S. economic activity. Historically, these kinds of health scares have often seen markets recover, in some cases more quickly than others. Typically, the drawdown is recouped in a year or less. Much of the response is based on the unknown length of time to find a workable vaccine. More important is probably the the question of how much of a change will we see in the US economy? Will there will be a an impact on travel or tourism related industries? It seems self evident there will be, the question is how much and for how long? Those segments of the economy are enormous and any kind of a severe cut is certainly going to impact GDP growth.
With these issues, there is tremendous uncertainty about how the future plays out. As a result, markets do what they always do in these kinds of situations. People sell first, excuse me, the algorithms sell first, and ask questions later. As far as conditions in the United States, other than the news of the virus, very little has changed as far as financing, inflation, banking, housing, or the automobile industry. There is no major problem with banks in terms of leverage or non performing loans that could cause a systematically important institution to fail. Private equity companies remain flush with cash and the venture capital industry remains fertile with plenty of companies in the pipeline ready have investment banks take them public.
On the earnings front, the last quarter of 2019 has been one where most companies have shown acceptable profit growth. Much of that depends on the company and it’s specific business model, plan, strategy, and execution. We have seen large companies like Apple and Microsoft warn about reduced profits during the first part of 2020 because of the virus problem. Politically, with the Democratic nomination looking as if it will go to social- Democrat (as opposed to a flat out socialist or communist) Bernie Sanders, the uncertainty of having such a pro-worker, anti-capitalist candidate running the United States government will not help investor sentiment in any way, shape or form. If Mr. Sanders were to get elected President, let’s just say you will see a big market reaction. Of course, nothing is ever certain but, without question, the next six to nine months probably will be full of plenty of volatility. Buckle up.
Global Economic & Financial Markets Outlook- Corona Virus Slams Global Equities! (All country index data provided by countryeconomy.com, February 27, 2020.)
The last week of February was the worst equity market performance since the financial crisis of 2008. Most major global stock market indexes lost anywhere from seven to fifteen percent of their value. The cause of the selloff is the fear of the Corona Virus turning into a major global pandemic and the commensurate reduction in economic activity. It is interesting to consider all of the different potential reasons for equities to draw down: Inflation, deflation, currency depreciation, leverage, negative interest rates on fixed income assets, trade policy, military conflict between countries (Iran-Saudi Arabia), and energy disruption. I am sure there are plenty of others I did not mention which could be considered as well. Very few market participants would have mentioned a global pandemic caused by a virus. The damage wrought during the selloff has been quite severe. Let’s take a look at the carnage.
In Asia, Shanghai’s index is down 5.57% year to date, Hong Kong’s Hang Seng lost 7.31%, Taiwan’s TAIEX fell 5.88%, Japan’s Nikkei shed 10.63%, the Philippines PSEI dropped 13.15%, and South Korea’s Kospi gave up 9.59% Across Europe, the FTSE in the UK retreated 12.70%, Frances CAC was trimmed by 11.18%, while Germany’s DAX slid 10.25%. Spain (-8.65%), Italy (-6.48%), Portugal (-8.60%), and Greece (-21.42%) are also mired in losses, as is the rest of Europe. Australia (-3.63%), Canada (-1.69%), and Costa Rica (-1.34%) suffered slight losses, while modest gains took place in South Africa’s JSE +2.43%, Tunisia (.69%), and Slovakia’s SAX (+1.82%).
Looking forward, the impact of the virus on global economic activity will get all investors attention over the next few weeks. Given the velocity of the selloff, markets have now decided the impact will be severe. Time will give us the answer as to how accurate that assessment is.
The Art of Contrarian Thinking- The Psychology Of Handling A Market Selloff (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)
The last week of February was quite difficult for United States equity investors. Stock markets lost over ten percent during the week ended 2/28/2020. Each day saw drops of 1,000 points or more on the Dow Jones Industrial Average. From a psychological standpoint, the loss of value during a selloff can be quite traumatic if you concentrate on the amount of capital potentially wiped away. If you analyze the numbers involved in previous market declines, it is often the case that over ninety percent of all stocks suffer losses. If you own stocks, you have to accept there are going to periods where there are declines. Maybe even more important are the actions you take during these time frames. First, if you are comfortable with the quality of your holdings and why each one is in the portfolio, the worst thing you can do is sell out of fear. If you need liquidity, that is a different situation altogether and calls into question why this capital is invested in stocks. Most advisors will tell you only to invest in the stock market with money you want to keep there for a long period of time (think five years or more). Still, if you need cash quickly, by all means you should look at the your holdings to find the positions you have the least confidence in as far as the quality of the business. Choose selling candidates based on important factors like growth prospects and prior performance. In most circumstances, the ideal action is to be patient and do nothing. If you are an aggressive investor, trimming a little from large gainers and raising cash to invest in your best holdings is also a good strategy. As a way to reduce your stress levels, try to not look at the market while it is open. It is probably best to view your portfolio around once a week, depending on your ability to handle falling markets. Another calming strategy is to see where the market is in a few weeks. In many cases, the recovery starts much sooner than anyone expects. Finally, if we look back at the selloff in 2008, it was perhaps a once in a generation situation because of the leveraged financial condition of investment banks, commercial banks, and massive insurance companies. The current selloff has no such structural issues, but the vagueness of the health scare and volatile market drops certainly can difficult from a psychological perspective. In the vast majority of these heavy selling periods, markets recover if you are prepared to be patient.
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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)