Category: Investments

Author: Tim Courtney

Market Touchpoint

Date: 03/16/20

Market Touchpoint
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.



Sources:

1. CNBC.com (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.


PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. 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. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971 

About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE