Market Update

Market Update—3/3/2020

Given that this Coronavirus scare seems to be turning into a bit of a panic, I wanted to take the time to reach out to everyone and give them our thoughts on the market.

Obviously, there has been a big and rapid decline in equity prices. In our opinion, this decline has been built on the back of three things:
1) Coronavirus fears
2) The rise of Bernie Sanders
3) And a market that is coming off an amazing year of upside performance

Let’s address each of these items in reverse order.

Last year, the market had an incredible run to the upside. The price change on the S&P 500 last year was 28.88%. Given this combined with the fact it is a Presidential election year, it makes sense for the markets to demonstrate a fair degree of volatility. I would make the argument that, regardless of Coronavirus fears, any market coming off a big upside move with the uncertainty of a Presidential election looming in the distance would face challenges in repeating that great performance the following year.

Building off of that, this year’s Presidential election seems to be adding a new wrinkle of intrigue. Bernie Sanders, a socialist, is making some waves in regards to gaining the Democratic nomination for President of the United States. Of course, his socialist beliefs are seemingly not in line with America’s tradition of free market capitalism. He wants student loans forgiven, health care for all, and isn’t afraid to raise taxes on businesses and individuals to help pay for some of those costs. With this, it is not surprising to see the market selling off as a socialist, who seems to be anti-capitalism, is gaining in popularity with the American voters.

And, finally, we have an incredible amount of fear taking hold of the market regarding the Coronavirus. Frankly, it doesn’t appear that the Coronavirus is the deadliest of all the major healthcare crisis’ we’ve seen in the recent past. According to the Kaiser Health News, the mortality rate of people who’ve contracted the Coronavirus is 2.3%. The mortality rate for SARS was 9.6% and for MERS it was 35%.

Given this, it doesn’t seem like the market is worried about a global pandemic that will kill hundreds of millions. However, the fear seems to be more focused on the economic side. It appears that investors are concerned that a recession might arise from this virus. If the virus leads to massive long-term factory closings and supply chains get disrupted, then the global economy could face a bottleneck in production and distribution and that could cause a recession. And since it has been such a long time (12 years) since our last recession, market participants might be pricing one in because they feel we are “overdue” for one.

All in all, these factors seem to be a wild confluence of events that just happen to be making the perfect storm of fear and worry for the markets. Although these fears weren’t predicted by almost anyone in the world, clients at MRP Capital Investments appear to be in solid shape across the board. Make no mistake a market that falls 10% in less than a week will result in virtually all portfolios facing some downside pressure.

Nevertheless, we had been net sellers into the year end and beginning of the year rallies in the stock market. The result of those actions were to see, in a seemingly across the board manner, no over-exposure to equity investments among clients. Not that many clients were under-weight stocks at the time of the unexpected Coronavirus fears overwhelming the market, but almost every client was neutrally weighted to equities relative to their custom tailored investment policy statements. This keeps our risk-controls in place in regards to asset allocation. Furthermore, we are over-weight the more defensive sectors of the market (healthcare and staples being the two big standouts). Again, it is our hope that these tactics shield our clients from some of the market volatility, while providing us ample firepower to buy stocks at these cheaper prices when things settle down.

And that is our plan: to monitor the economic data and the markets and begin buying when things appear to be settling down. If we do happen to see this market turn from drastic downside moves to big upside moves, there is, generally, a big intra-day reversal which triggers that change in investor outlook. For example, we might see the Dow Jones Industrial Average begin the day down 1,000 points. Only to see that 1,000 point loss reversed a few hours after the market begins trading and the index ends the day up sharply. That’s the kind of reversal I’m referring to.

In the meantime, we will be doing what we can on a daily basis. With that in mind, we think client awareness is vitally important. So, we’ve attached two reports to this email. The first is a Q4 2018 newsletter. In that newsletter, we wrote an article entitled “Ugh; Another one!” In that article we discuss the 2018 4th quarter sell off and how we felt that if we gave the market enough time, we would see a pretty substantial rebound in equity prices. And we highlighted a number of other market sell offs that we’ve managed money through and survived the downturn and ended up thriving in the coming recovery. We feel this selloff should be quite similar to those past sell offs. Hence, including that article along with this communication.

Lastly, we have included our firm’s latest full blown research report entitled, “Liquidity.” Granted it was written about a week before this full blown Coronavirus panic overtook the markets. But that means the report was focused on the fundamentals of the economy, not the fear created by the virus. What that report shows is a market that needed a pullback to remain in sync with the economic fundamentals that provide the underpinnings of the market. Given that was our mindset before this pullback began, we are actually relieved that we are deflating market prices a bit. Short-term it is painful, but long-term it may be vital for the continuation of this Bull Market.

As always, we will remain diligent in our efforts to stay abreast of the market and economic fundamentals and the positioning of our portfolios.

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