Market Insight - March 2020

Brandon Grimm, MBA, CFA

Brandon Grimm, Portfolio Manager at Gilbert & Cook provides insights on recession concerns, recent market volatility, and the importance of re-balancing.

There has been much discussion and debate over where we are in this economic cycle. From our perspective, we remain in the latter stages but believe the modest-growth/modest-inflation/low-interest rate environment we have been living with has a good chance of continuing over the course of at least this year. While the probability of a recession occurring at some point in 2020 is not zero, we do believe it is low. However, as I will discuss later, the chances of a recession do appear to be growing as the coronavirus spreads globally and begins to impact global supply chains and consumer confidence. 

Despite those fears, the Gilbert & Cook Investment Team still maintains a positive view on the U.S. economy, as current fundamentals still support a prolonged recovery where unemployment remains low, job growth and wages increase, borrowing costs remain low, and most importantly we see a healthy and confident consumer base. 

We compare this recovery to running a marathon and reiterate our view for investors to remain fully invested according to their diversified, long-term Strategic Asset Allocation. 

Coming off an extraordinary 2019, the stock market continued its upwards trajectory with the S&P 500 Index closing at a record high of 3,386.15 on Thursday, February 19th (up +4.81% YTD). Then last week fear over the Coronavirus (COVID-19) finally gripped investors as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% multiple days and ended the week down 12.26% and 11.44% respectively. The daily declines were the largest daily declines in two years and the weekly return was the worst since 2008. With minimal volatility over the past six months, one could argue at least a minor pullback was overdue irrespective of the catalysts. 

As we look at the next few quarters, the real economic impact of the coronavirus will need some time before it is fully understood. In the meantime, fear appears to be driving the markets to price in a major economic impact and even a potential recession. Although we are not comfortable going there yet, we recognize the longer the virus disrupts trade and supply chains, the greater the chance the markets remain at correction territory levels and a subsequent economic recession.

Maybe this time is different….or is it?  We look to history for the answers and similar recent events for context. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%.1  As we have pointed out during prior times of stress, the S&P 500 Index has never failed to fully recoup any losses sustained from corrections or bear markets over time. In other words, the stock market and more broadly speaking, the U.S. economy, has proven itself to be quite resilient. Last week’s rather quickly pullback was likely overdone as evidenced by the strong market rebounds on Monday, with various stock indices gaining over 5% on the day. For more perspective on pullbacks and market volatility, reference our Timely Topic from October 25th, 2018 entitled Market Update – “Is this still normal?”.

This does not mean investors should dismiss the outbreak altogether, but rather use these pullbacks as:

1) a time to ensure cash needs are supported, or

2) buying opportunities to re-establish or add to equity exposure if your risk tolerance allows.

Certainly, risks remain, and the duration of the outbreak will determine the near-term impact to the global economy. Revenues and earnings from companies that are highly exposed to China will unquestionably be affected. The longer the virus remains, specifically in China, the greater risk to the global supply chain and ultimately the soundness of economic fundamentals.

In the end, we believe the U.S. is relatively insulated given a strong economy and fantastic health system. Robust job growth and more fiscally responsible consumers continue to provide solid underpinnings in the U.S. Economic data has been strong to start the year and so far, nothing has changed. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come.  

Right now is not the time to overreact. Instead, Gilbert & Cook has been proactive in protecting portfolios from events and pullbacks like these during this recovery by regularly re-balancing portfolios. Through the planning process we established a Strategic Asset Allocation which is all about balancing risk and reward given your time horizon and other factors. Regular portfolio re-balancing is a disciplined process to help reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. We continue to focus on investing for the long run and potential short-term disruptions can give investors long-term opportunities.

As we’ve said before; Rely on process, not prediction. The Gilbert & Cook team keeps focus on patience and a long-term perspective.

Sources: 1First Trust Advisors L.P.