Monday 3/16/20 the Dow Jones Industrial Average fell 2,997 points or -12.9%, the worst point loss in the history of the index. Tuesday 3/17/20 stocks rallied +5.20%, before plunging again on Wednesday 3/18/20 -10.72%. Over the last month the Dow Jones has returned -35.23%. Global markets have fared similarly. We always look at market declines from the perspective of time lost: the Dow Jones is now trading at about the same level it was in November of 2016. The stock market gains during the Trump presidency have been erased.
How this compare to other stock market declines?
This level of volatility in the market is unprecedented. It marks the fastest decline to bear market territory in the history of the market, twice as fast as 1929 (see chart below).
What is the cause?
Concerns over COVID-19 (formally SARS-CoV-2) a pathogen from the coronavirus family, have led governments to take containment measures which have significant economic implications. It now seems likely we are headed toward a recession or depression. The greatest damage to financial markets has come from market psychology and panic. We anticipate that markets will recover fully over time.
Is COVID-19 worse than the seasonal flu?
Perhaps the largest misconception we are hearing is that COVID-19 is no worse than the seasonal flu. Across all ages COVID-19 has a fatality rate of around 2.3%, a number which has been declining, but still is much higher than the seasonal flu at .1%. It is also more contagious than the seasonal flu, with an R naught (the estimated number of other people each sick person will likely infect) estimated from 2 to 2.5 For comparison the seasonal flu has an R naught of 1.3, and Ebola an R naught of 2. As discussed in my previous update,asymptomatic transmission means a person can become contagious prior to exhibiting symptoms.
Can you give more data on COVID-19 fatality rates?
To better understand the statistics behind the spread of COVID-19 I highly recommend the following site: https://ourworldindata.org/coronavirus. The chart below provides more context for COVID-19 fatality vs. seasonal flu.
What are "social distancing" policies?
In order to slow transmission Americans are making significant social changes. Companies are encouraging workers to work from home, sports events are cancelled, and universities are transitioning to online classes. It should be noted these strategies are not intended to reduce the number of cases, instead they focus on “flattening the curve.” Distributing the number of new infections over time can help to avoid overloading our healthcare system.
What are the downsides to "social distancing" policies?
Cancelling events and placing travel limitations may help slow transmission, but it has severe economic consequences. Airlines, cruiselines,and hotels are the hardest hit. Global production is also anticipated to slow, particularly with how long China’s factories were off-line as they imposed strict quarantine measures. In our interconnected world this likely led to a supply shock. The federal reserve has responded with fiscal stimulus providing demand-side relief, further confusing and perhaps even inciting more panic in markets. Ultimately financial markets are reacting to the economic impact of containment measures, collateral damage in the fight against COVID-19.
What are your economic forecasts?
Our base assumption is now a global recession. We anticipate global growth to contract to the lowest we have seen since the financial crisis. We anticipate a strong fiscal and monetary response from central banks, which should drive a recovery.
How long do you expect this to last?
At this point even medical professionals are not able to accurately forecast where COVID-19 is headed. This depends largely on how effective containment measures are, as we are unlikely to see a vaccine or treatment on the market in 2020. We expect the peak to occur over the next 8 weeks. It is a popular opinion that the virus is seasonal, or prefers cold weather, though this has not been definitively proven.
What are we missing amidst all the mass hysteria?
It has been largely overlooked how effective containment measures were in China. Hubei province has reported zero new cases of the virus in the past two days. China imposed strict containment measures which appear to have caused significant economic harm, but also brought the virus to a halt. While it is difficult to trust any data reported by the Chinese government, it does appear that manufacturing has started again. Given that the outbreak in the U.S. is a month or so behind China, if containment measures are as effective in the U.S. as they were in China we could see a rapid decrease in the number of cases. That is a big "if", as the U.S. mostly squandered the time that it had to prepare for the virus.
How are portfolios under your management performing?
During the outbreak in China and prior to the first cases in the United States our advisory team decided to reduce allocations to risky assets to mitigate downside exposure should the virus spread globally. Our portfolios included hedge positions and shorts on the broad market. We also went overweight treasuries and stocks correlated to COVID-19, including those producing vaccines, treatments, or providing testing services. A few of largest equity holdings over the past month have widely outperformed the market, including Gilead Sciences, Johnson & Johnson, Roche Holdings, and Teladoc. We also held Inovio Pharmaceuticals during a 200%+ price surge as they were first to announce a COVID-19 vaccine. Over the past month our clients have experienced single digit losses on average, and thus largely preserved buying power to buy stocks as they bottom.
Are you buying stocks yet?
We continue to hold a large cash reserve and do not feel the market has reached bottom. We like e-commerce companies like Wal-Mart, Amazon, Alibaba and JD.com and have or will be initiating positions. We also initiated purchases of Walt Disney stock, which we believe is fundamentally undervalued. Disney stock is a good proxy for the level of panic selling in the market. It is trading at the same share price as July 2014. That is pre-Star Wars acquisition and pre-Disney+ streaming launch. It is down 39% YTD due to park and cruiseline closures. Parks & resorts account for 34% of revenue for Disney (Media is 42%, Studios 15% and 9% Merchandise). Losing a few weeks (even months) of revenue from parks means a devaluation of that entire business segment from the market price?
Are stocks cheap?
Overall we do feel equity valuations are attractive, however investors will continue to panic on negative news associated to COVID-19. We prefer not to increase risk exposure until we have more clarity on the effectiveness of COVID-19 containment measures. We view the turning point of buying equities as when the growth rate of new cases of COVID-19 slows.
CEO & Managing Partner
Harman Rogowski & Associates
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