Author: Tim Courtney
By Tim Courtney, Chief Investment Officer
This week, we officially entered into bear market territory.1 As the coronavirus continued to spread across the U.S., volatility and uncertainty spread through global markets. Because there are very few comparisons over the last 50 years for what we are now experiencing, the speed at which we reached bear market status was unprecedented. The market has now discounted earnings and valuations of nearly every company regardless of their industry or financial position.
To that end, we wanted to share two key observations with you as it relates to the market downturn:
1. A recession has likely been priced in. With the travel restrictions, canceled events, as well as closed theaters and parks, we very well may be headed for at least a mild recession. The market, which at its recent low had dropped nearly 27% from its high,2 has likely already priced this in. The market doesn’t always correctly forecast recessions, but it looks like it could be correct this time.
The last two bear markets and subsequent recessions we experienced were primarily caused by market, not economic factors. In 20003 and 2008,4 market misallocations were the culprit for the severity of the declines. Currently, the decline appears directly related to economic factors that have quickly formed in the last several weeks
2. Lower earnings are almost certainly temporary, like most health crises. Most observers expect this health crisis to be temporary. However, markets have very quickly discounted stock prices by 25% as if earnings will be impaired forever, illustrated in the chart below.
To be sure, there will be certain sectors, such as cruise operators, that take longer to reach prior earnings levels as customer behavior may have fundamentally changed.5 And, ultimately, we do expect 2020 earnings to fall from the record level set in 2019. However, we also expect to see earnings rebound later in the year and into 2021. Our current situation does not warrant the permanent discount of all future U.S. and international company profits, unlike a change to higher corporate tax rates would.
Even though the longest U.S. market bull run is now officially over,1 markets over the last 11 years have still performed very well. Since March 9, 2009, the iShares MSCI All Country World Index (ACWI) has returned 225% cumulatively as of today, including the recent decline.6
While the market is trying to make sense of something that has no modern precedent, volatility is likely to remain high. In the meantime, we want to remember that we are invested in companies that will, in the future, be as productive as they were just three short weeks ago. If you have any questions about your investment portfolio, please reach out to your Exencial advisor at any time.
(3/11/20) – Dow closes in a bear market for the first time since
2009—here’s what that means
2. DFA Returns 2.0
3. Investopedia (6/25/19) – Dotcom bubble
4. Investopedia (6/25/19) – The fall of the market in the Fall of 2008
5. CNBC.com (3/12/20) – Carnival shares tank 31% after Princess Cruises says it will suspend global operations over coronavirus outbreak
6. Yahoo! Finance (data as of 3/13/20) – iShares MSCI ACWI ETF (ACWI)
The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.
Past performance is not an indication of future returns. All investments in securities carry risks, including the risk of losing your entire investment. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. In addition, there is not guarantee that the investment objectives of Exencial’s investment strategies will be met. Asset allocation and portfolio diversification cannot ensure or guarantee better performance and cannot eliminate the risk of investment losses.
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