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Oil Prices Plunge and Global Markets Reel

March 10, 2020

“Bear Markets are when stocks return to their rightful owners.” – Warren Buffett

Global equity markets careened on Monday following more concerns about the spread of the coronavirus as well as an oil price war between Saudi Arabia and Russia which intensified over the weekend. In the opening minutes of trading, the U.S. Stock Market circuit breakers tripped after a 7% decline, causing the markets to close for a period of 15 minutes. Selling was heaviest in the energy stocks, suffering the most potential damage from 24% lower oil prices. Companies with higher levels of debt were generally punished the hardest. The travel industry (cruise, lodging, and airlines) also suffered outsized selling with the potential for lower earnings over the foreseeable future due to a significant reduction of business and discretionary travel the past few weeks. Most likely, they will be slow to recover.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” – Sir John Templeton

Let’s tap on the brakes and assess the financial landscape for a moment. What has changed over the last 48 hours? Certainly, the probable implications from a spreading virus with the potential to harm economic growth are not to be taken lightly and cannot be fully quantified yet*. Simply put, as consumers stay home, less money is spent and thus, less money is generated in the economy. Furthermore, as workers stay home, productivity, production, and supply chains are affected. The result is a cascading economic effect. While the implications continue to unfold, we will likely see lower economic growth as well as an increased chance of an economic recession. That said, the severity depends on the length of an economic disruption.

Falling oil prices are a blessing and curse. For consumers, lower oil prices could become a financial stimulus, with less of the personal budget spent on energy. This might also help consumer goods because plastic and packaging should become less expensive. Concurrently, consumer goods and groceries could become less expensive over the coming weeks and months. However, lower energy can be damaging to other industries: energy companies, industrial companies that support energy, and financial institutions that lend to these industries. We would suggest that the good outweighs the bad, but caution that lower energy prices are not a total boon for the economy.

“Remember that the stock market is a manic depressive.” – Warren Buffett

We believe the market is starting to overshoot the downside in the short-term. Fear, as measured by the Volatility Index (VIX) shifted to 62 on Monday; a level higher than it hit during the 2008-2009 sell-off. Historically, when this index exceeds 50 over the short-term, it usually signals a good time to buy stocks for the next 12-18 months.

“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the [market]. When you sell in desperation, you always sell cheap.” – Peter Lynch

The news in China concerning the coronavirus is improving and the U.S. municipalities are proactively addressing infections in affected areas. Containment is key and we are seeing progress. While we expect economic growth to be impacted, we do not believe the economic effects will be prolonged.

U.S. interest rates are at record lows, with the 10-year U.S. Treasury closing at 0.59% on Monday. Mortgage rates have continued to move lower. You may want to consider refinancing your debt as well as shortening the term. We would be happy to discuss this with you. Managing your balance sheet (and debt) is just as important as monitoring your investment strategy.

“The safest time to invest is when there is blood in the streets.” – Mark Mobius

We do not claim to have a crystal ball and don’t know where the market bottom might be. However, we do believe that for long-term investors, opportunities to buy are becoming more abundant. The frothy valuations of 2019 have receded. We see increasing value in some sectors, including healthcare and technology, while energy, consumer cyclicals, and financials may continue to struggle. We would be delighted to discuss what strategies are appropriate for you, our clients, because every investor and circumstance is unique. Additionally, we are happy to talk with your friends, colleagues, or family members who may need professional advice while navigating these turbulent times.

Remember that panic is not an investment strategy. When building wealth; patience, objectivity, and calm will work to your advantage. Take a deep breath and focus on your long-term objectives. As always, thank you for your trust and confidence.

*As of this writing, there have been 110,616 total cases of coronavirus globally. That figure includes both active and resolved cases. Presently, there are 44,388 active cases across the globe. Of those ill, 87% have mild cases (think, common cold) while 13% are serious or critical. 66,228 cases of coronavirus have been resolved. Of those 66,228 cases, 94% recovered fully and are no longer sick and back to going about their daily lives. Broadly speaking, there has been major progress in China, where today there are just 44 new cases and 18,901 active cases. Progress is being made globally to address the spread and treatment of the coronavirus.

*Source: Kinsale TradingLLC
© James A. Betzig & W. Michael Smiley, 2020

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