Significant Volatility in the Markets
Well, I’m back with another market-related email. We have continued to see significant volatility in the markets, and we’ve talked with many clients over this time. The following are our most recent thoughts about the markets, COVID-19 and how this entire situation seems to be playing out. Not unlike our last email I’m coming back to how our thoughts have evolved in the past week. I again repeat the same two areas of concern; 1) the market impact is now more significant than we expected (markets down -30% at worst so far), and 2) we feel the recovery time could be longer than our last six to nine-month estimate, now pushing back to nine to twelve-months.
Financial Markets Hate Uncertainty
We still have not changed our feeling that this is an event driven market condition. Financial markets hate uncertainty and COVID-19 continues to provide uncertainty in spades. With COVID-19 now officially labeled as a pandemic, it’s very hard to know how much further we go from here. The U.S. is still in the early stages of data-gathering, but with thousands of new test kits coming online over the next several days, our guess is that data will start gathering quickly. And, we expect it won’t be comforting as the number of new cases will likely explode. The good news is that typical virus infections build rapidly to a peak, then drop-off just as rapidly. As proof I offer the fact that China diagnosed only one new COVID-19 case as of yesterday, and they have dismantled all of their makeshift hospitals that were put up to deal with the large numbers of infections. Considering China first identified the coronavirus on December 27, we are looking at about a 3-month lag to get beyond the peak. Here in the U.S. we identified our first case of coronavirus on January 21, we are just under a month behind China’s timing, which would put past the peak of infections around mid-April. We aren’t doctors or epidemiologists, so these aren’t predictions of the virus, just observations based on available data.
Have We Hit the Market Lows?
While we do not yet believe we are at the market lows of this situation, we do believe we are close. Currently, our logic has us looking at a worst-case of another 10% move down for the S&P 500. We are happy to see progress in the containment efforts in the U.S., and just as excited to see our federal government stepping up to offer help to those affected by those very same containment efforts. We feel it is right to think of this as “wartime” conditions, though we believe it will be a short war. Unfortunately, not all countries seem to have gotten the message on containment. South Korea did a great job of containment, as has Japan. China also did a good job once it was willing to admit to the problem. Europe, on the other hand, has been slow. Looking at traffic congestion data we see only limited reduction in traffic over the past week in major European cities. I think the U.S. is trying to follow the South Korea path as best it can, though many would agree we could have done so sooner.
We will continue to research the situation and markets and our plan continues to be to make trades as we get nearer the market bottom. We expect these trades will be profitable a year from now. We firmly believe this is an investment opportunity, albeit very painful along the way.
We hope this note helps explain our position as our country, and the markets, digest this terrible situation. Based on the COVID-19 guidelines we temporarily aren’t meeting with clients in-person, but please feel free to call us with questions or for further discussion.
Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.
This newsletter is for general information only and should not be considered investment advice. Investors should consult with a trained investment professional to discuss their particular situation.