Camelot Portfolios
Dear Friends,
The 20% decline we mentioned in our update last week swiftly became a 30% decline as the panic and economic damage over the Coronavirus continued to intensify. We have now seen 3 days in a row with roughly 10% moves in the equity markets, leaving us at fresh closing lows today (Monday 3/16/2020). The 12% selloff came despite significant Fed action over the weekend – including an emergency rate cut of 100 bps and a new $700 Billion Quantitative Easing program.
I have heard in many conversations with advisors and clients the belief that this is going to get much worse before it gets better. While this is absolutely true about the Coronavirus, it may or may not be true about the markets. The stock market is a forward-looking discounting mechanism and is well-aware that the virus & economic fallout will get much worse. This is why the market fell roughly 20% in just the last week. In addition, we are seeing panic selling & forced selling (margin calls), which push the market further down.
The concerns expressed in our last couple updates regarding the credit markets are now elevated as cracks are appearing in several places. A full-blown credit crisis could easily take the market down another 20%. The Fed is now throwing trillions of dollars at this situation to keep it from spiraling out of control and whether or not they will be successful remains to be seen.
Based on suggestions and orders from the President and many Governors over the last several days to self-isolate & shut down businesses, I believe we are now in recession, and it is likely as severe as what we experienced during 2008. The official recession will not be declared until late this year, but by then we will likely be coming out of it. The market already knows this and is trying to price it appropriately, but the extent of the damage is impossible to quantify at this point. This economic damage is what the government needs to address, and quickly. We expect to see several aid bills in the coming weeks as politicians want to keep their jobs.
These factors all make it difficult to know where the bottom may be in the markets. We may have already hit it, but if so, I do not expect a V-bottom like we saw coming out of 2018. I expect we will chop along for a few weeks with sharp bounces and falls as the market tries to digest the impact of this crisis. Frankly, I am suspicious of the sharp rallies we are seeing as the VIX and credit markets don’t seem to be supporting the moves. Either way, if there is further downside ahead of us, I believe it will come fairly quickly and will bottom before the peak of the Coronavirus crisis.
Bottom line – we are likely near the bottom (within 20%), so investments made at this point will probably produce nice returns 12 months out. But the economic damage is immense with more to come. I am concerned it is not yet fully priced into the market, much less over-priced as often happens. So the best opportunities may still be ahead of us. I believe the best approach is to start/continue buying on pullbacks in the market. If we see an opportunity to go all in, we will let you know.
Kind Regards,
Darren Munn
Chief Investment Officer