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We look for vulnerabilities, not triggers.
-James Athey, Senior Manager at Aberdeen Standard and regular financial commentator on Bloomberg TV
Global stock markets sold off violently the past week and a half following news about the novel coronavirus (Covid-19) spreading now to more than 50 countries outside of China, including clusters of cases in South Korea, Italy, Iran, and Japan.[1] The S&P 500 fell from its all-time closing high on Wednesday, February 19th, down into “correction” territory (decline of more than 10%) at a record-setting pace of just six trading days,[2] and it continues to trend closer towards “bear market” territory (decline of more than 20%) as we pen this letter. As we wrap up the S&P’s worst week since 2008,[3] all equity market gains for 2020 have been wiped away and then some as global investors sell out of stocks to buy safe haven assets like gold and U.S. Treasuries. Meanwhile, the U.S. Centers for Disease Control and Prevention warned this Tuesday of the risk of the virus spreading within our own borders,[4] and yesterday the World Health Organization said the outbreak is on the verge of being upgraded to a pandemic.[5] Futures markets are predicting the Federal Reserve will start cutting interest rates again as early as its next meeting in mid-March, and President Trump requested $2.5 billion in emergency funding from Congress to combat the virus.[6] Economists are estimating that as much as $1 trillion of global GDP could be lost as a result of the outbreak[7]; CNBC reports global stock markets have already shed $6 trillion of value in response.[8]
These are concerning times for many, and Covid-19 presents real potential human consequences. Our thoughts are with those directly impacted. Providing investment commentary during tragic events feels somewhat insensitive, but in our role as fiduciaries we believe it is important to share our perspective with you in light of the outbreak’s impact on financial markets. At Sapient, we came into 2020 feeling the markets were priced for perfection with stocks, bonds, and consumer confidence all sitting close to all-time highs. It appears many found the market’s enthusiasm contagious,[9] but we remained guarded as the markets felt fragile and overbought. We weren’t sure what would cause the next correction, but we believe corrections are an inevitable part of both market and business cycles and so, to paraphrase James Athey above, we focus our energy on looking for vulnerabilities rather than triggers. Covid-19 seems to be the surprise trigger this time – and some pundits suggest it could remain a headwind for markets through the spring and possibly summertime[7] – but at Sapient we have been conservatively positioning client portfolios for precisely these types of market events. We sensed a storm on the horizon, though admittedly we didn’t know where or when the lightning would strike; we never do. Which is in part why investing is so challenging, and why it’s important to build diversified portfolios and maintain discipline in regards to rebalancing and risk management. This is not the first health epidemic markets have had to navigate in recent decades, as illustrated below, and it’s unlikely to be the last.
As you know, Sapient’s investment process is not event-driven and market volatility alone does not influence our strategy. We take a long-term, multi-year perspective and monitor underlying market fundamentals – which generally move much slower than market prices – to guide material changes to portfolio allocations. Rebalancing in this current equity market correction may be prudent for some clients, but we do not believe complete portfolio repositioning is appropriate.
All of us at Sapient thank you for allowing us to serve you, and we whole-heartedly embrace our responsibility to steward your investment capital with great care.
Sources:
1. John Hopkins Covid-19 tracker, February 28, 2020
https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
2. “We Just Witnessed The Fastest Stock Market Correction on Record,” Bloomberg, February 27, 2020
3. “Dow plunges 1,191 points on coronavirus fears, and S&P 500 posts its worst day since 2011,” Markets Insider, February 28, 2020
4. “US health official warns public to prepare for coronavirus outbreak,” Financial Times, February 25, 2020
https://www.ft.com/content/970aabb8-57fc-11ea-abe5-8e03987b7b20
5. ”Fatal mistake" for countries to assume they won't get coronavirus -WHO chief,” Reuters, February 27, 2020
6. “Trump Urges Calm Even as US Reports Worrisome New Virus Case,” New York Times, February 26, 2020
https://www.nytimes.com/aponline/2020/02/26/us/politics/ap-us-trump-virus-outbreak.html
7. “Coronavirus Guts Client Portfolios,” Financial Advisor IQ, February 25, 2020
8. “Global stock markets have lost $6 trillion in value in six days,” CNBC, February 28, 2020
https://www.cnbc.com/2020/02/28/global-stock-markets-have-lost-6-trillion-in-value-in-six-days.html
9. “Hedge Funds Ramped Up Leverage in Stocks Just Before Market Rout,” Bloomberg Markets, February 25, 2020
Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitutes the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
