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Coronavirus Update (March 16, 2020)
- The severity of the Coronavirus outbreak should not be downplayed – it has cost human lives and the toll will undoubtedly increase. However, the improving situation in China is encouraging. In China there are 1.4 billion people yet total cases number a relatively low 80,932. The daily count of new cases has fallen to 11 and their economy and market are already in the early stages of recovery. The reliability of Chinese reporting is admittedly suspect, but has been corroborated by the progress in South Korea (85% drop in new cases).
- Although we believe the virus will be contained, it has created a public health panic and thus self-fulfilling damage to the economy. The forward course for the economy is extremely difficult to forecast. It will of course depend greatly on the path for the virus.
- Perhaps the best cure for the virus is a panic. People are distancing themselves and children are home from school.
- We are not virologists, but after careful study our expectation is the U.S. infection cycle will loosely mirror that of China. The following 4-6 weeks should be the period for highest concern.
- Due to deteriorating consumer psychology and retrenching behavior, the economy will undoubtedly slow in the near term. However, the odds of a cataclysmic economic event remain low – the economy was too strong going into the crisis and interest rates are essentially zero. Once the sense of panic subsides, the economy should experience a V-shaped recovery as pent-up demand is fulfilled at the cash register.
- As measured by the S&P 500 index, stocks have declined 15.7% for the year (through Friday 3/13/20). However, the Index return understates the typical stock investors’ pain, as it is heavily upwardly skewed by the big five technology firms (comprising almost 20% of the index and posting a muted -6.9% average loss). For a truer read, the S&P 500 equal weighted index (the average return for the top 500 stocks) is more accurate. It has declined 21.8% for the year.
- CCM does not use exchange traded funds, equity derivatives such as options, or exotic hybrids when creating equity portfolios. We invest in the individual shares of large, high-quality firms such as Amazon, Home Depot, Procter & Gamble, UnitedHealth, Apple, Microsoft, and Verizon who have strong economic moats and solid balance sheets. Shares are traded on the major exchanges and are highly liquid.
- We have increased our targets for equity exposure in the healthcare sector. This has provided helpful defense, as the sector is the second best performer of the eleven industries in the S&P 500 since the sell-off began.
- Some have expressed concern over a potential financial crisis such as in 2008-2009. To date there have been limited symptoms of such. The Federal Reserve learned much from the last crisis and we are confident they will use all available ammunition to ensure markets are functional. Yesterday’s interest rate cut to zero was monumental, and the additional announcement of $700 billion in bond purchases confirms this is QE4. The three previous iterations of quantitative easing proved to be successful.
- We highly discourage dumping quality stock holdings at the giveaway prices of a panicked market. The alternative investment is bonds, which effectively trade at negative yields given current inflation levels.
- CCM bond portfolios are defensively positioned. Holdings consist of U.S. Treasury/agency issues and investment grade corporate bonds. We have maintained a very conservative maturity structure and do not expect liquidity issues within our intermediate term/investment grade tranche. In balanced portfolios, these bond holdings have acted as a powerful “shock absorber” against recent losses in stocks.
- Although Washington’s response has been sluggish, a stimulus/relief plan is now unfolding. As indicated by the Dow’s historic 1,985 point gain on Friday, investors appear to be enthused.
- As indicated by this morning’s stock market futures, we will give half of Friday’s gain back. However, missing the big “up” days in an oversold market while waiting from the sidelines is a strong detractor for long-term performance.
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