As I sit down to write these comments on the markets, the S&P 500 is down 7.6% for the day and 18.8% from its high, and oil prices appear to be in a freefall based on a price cut by Saudi Arabia in response to Russia’s refusal to reduce its oil output in coordination with other oil producers. Optimistically, at the same time I am reading news stories about the staggering declines experienced on this latest “Black Monday”; I am reading that Warren Buffett is “betting big on airlines” and that, with the exception of the energy sector, declines seem to be spread relatively evenly across stocks regardless of their characteristics (e.g. dividend paying vs. non-dividend paying), suggesting “panic” selling by traders trying to flatten their positions until such time that there is less uncertainty.
Q4 Market Update - AssetMark
Jerry Chafkin

Another Manic Monday?

Jerry Chafkin

Chief Investment Officer

AssetMark, Inc.

As I sit down to write these comments on the markets, the S&P 500 is down 7.6% for the day and 18.8% from its high, and oil prices appear to be in a freefall based on a price cut by Saudi Arabia in response to Russia’s refusal to reduce its oil output in coordination with other oil producers.1 Optimistically, at the same time I am reading news stories about the staggering declines experienced on this latest “Black Monday”; I am reading that Warren Buffett is “betting big on airlines”2 and that, with the exception of the energy sector, declines seem to be spread relatively evenly across stocks regardless of their characteristics (e.g. dividend paying vs. non-dividend paying), suggesting “panic” selling by traders trying to flatten their positions until such time that there is less uncertainty.3 I say this to draw a contrast with price declines associated with dramatic drops in analyst, or company, estimates of earnings. While I’m not a big believer in highly fitted historical examples, such as what happened after other Mondays with large market price drops (for the curious: prices were generally higher six months later),4 I retain some optimism given that the stock market’s peak-to-trough price drop occurred in the relatively short space of less than a month and is not the product of a long-lived, and therefore deeply rooted, negative investor sentiment and that the current peak-to-trough drop is still less than what investors experienced at the end of 2018.

Having said this, we should make no mistake that investor sentiment is currently severely negative, and stocks were probably overvalued prior to the current restrictions companies are imposing on business activity in an effort to contain the spread of the virus. Stocks were probably richly valued at the start of this year and after the drop may now be back in line with their longer-term growth rate.

It is challenging to reassure investors after today’s events in part because market events have been unfolding so quickly. There is little current data available on which to base an analysis. Year-end data, particularly employment, looked encouraging despite the spreading coronavirus. In the absence of economic data, market analysts generally rely on faster-moving market indicators. Unfortunately, these simply reflect back to investors the uncertainty and doubt with which they are wrestling. In the absence of current economic data, market analysts often turn to historical precedents of similar events, such as other viral outbreaks: SARS, MERS or the Avian Flu. However, these precedents don’t seem exactly comparable given that, in the past, China was a smaller portion of the global economy and these outbreaks were more localized than what we are currently seeing with the coronavirus.

The most complete set of economic data we have is from year-end and it were generally positive. Later this week, the next pieces of economic data that will be reported are weekly jobless claims and consumer sentiment. If a vaccine is 18 months off, and historically markets have begun to recover from past virus outbreaks within 9-12 months,5 the market impact may be relatively short-lived.

Lacking current data or highly similar precedents, the only advice we can confidently offer investors is that the economic value of all the world’s corporations has not suddenly gone to zero and any reduction in value will not be permanent. Consequently, the best thing investors can do is to avoid the panic that makes us feel like we need to do something urgently and to instead wait on new data later this week, or to see if the market continues to drop further over the next month. After the past decade’s returns (especially 2019) we can afford to give back some of those gains without jeopardizing our long-term financial goals. If investor emotions do not allow for this, they may want to consider multi-asset strategies that have the flexibility to profit from down markets as well as up markets (e.g., managed futures) and tactical limit loss strategies that have the flexibility to methodically exit and re-enter the stock market in a disciplined process that does not rely on investor emotions.

In trying environments like the present, it can be helpful to remember that petroleum price wars eventually end, market shocks typically have been temporary, and viruses burn out as populations develop “herd immunity.”

S&P 500 measures the performance of 500 leading companies in the U.S. Constituents generally have a market-cap above $5 billion and represent approximately 80% of the investable market.

1 Wall Street Journal, March 9, 2020
2 Forbes.com, “Warren Buffett Bets Big on Airlines,” March 9, 2020
3 Bloomberg, AssetMark
4 MarketWatch.com, January 22, 2020
5 Ibid.

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C20-15659 | 03/2020 | EXP 03/31/2021
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Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc. Savos Investments is a division of AssetMark.

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