Thoughts On The Coronavirus, Bernie Sanders & The Current Market Decline

I wanted to take some time to discuss with you the current market turmoil.  I may have some thoughts on what I think this could mean longer-term in a later posting.  Also I will push out to a later date my next article  on the fiscal issues in Illinois given the current state of things 

First let's look at the damage to the markets.  Currently major indices have lost about 10% from their highs set, believe it or not, about a week ago.  The Old Wall Street saying that "markets take the escalator up and the elevator straight down" is currently being demonstrated.   Given that most of these major indices are market cap weighted, many sectors and individual stocks have performed worse.  Still, a bit of context is in order.    The magnitude of the decline, while dramatic in how quickly it has occurred, is not that out of the ordinary for a market correction.   Also stocks are now trading about the same levels we saw just a few months ago.  The S&P 500* is still up around 30% without dividends since Christmas of 2018.  That's worth noting and worth remembering as we go through this market decline.

Ok so why such a huge decline and why now?  First and foremost a correction at some point this year was not unexpected by me.  This is what I said a few weeks back in my winter letter to clients:

"Markets haven’t seen a substantive down week now since Labor Day. As wonderful as this is, logic dictates that it won’t go on forever. It’s hard to judge if we pulled some of this year’s advance into the last three weeks of 2019. It is entirely possible that markets may post returns that are normal by historical standards but seem subpar when viewed through the lens of the last decade. There is a higher probability that we could see most of our gains in the first six months of the year as election uncertainty enters the picture next fall..."

Markets took off back in October and went nearly straight up without any major pullback until mid-February.  That kind of move begs for profit taking at some point.  Whether it was the coronavirus  or something else, stocks were vulnerable at some point to a correction.  The prime motivator for this sell-off has been the economic impact of the coronavirus on the world economy.  The secondary impact I believe is the unexpected surge of support in the Democratic primaries for Bernie Sanders.  I have been amazed that it took this long for investors to worry more about the coronavirus.  It has been ravaging China and parts of Orient now for the better part of three month, yet markets ignored these implications until it became obvious that the virus was not going to be contained to Asia.

 I have been and still remain skeptical on whether the world should become as alarmed about the longer-term medical implications of the disease based on what we currently know.  After all, we are in prime flu season right now in the northern hemisphere.  Millions will get the flu this winter here in the US and on average tragically over 60,000 die here from its complications, yet life goes on and very few of us limit our winter activities because of the flue virus.  However, the economic impact  as millions stay home across Asia and work has ground to a halt is impossible to now ignore. Companies in the US are now pulling their forward guidance as conditions on the ground remain so uncertain.    Economic growth both here and abroad will likely now be lower than previous estimates as a result of this stoppage.  Right now it is impossible to estimate how much the economy will recover from this once things get back to normal, hence some of the uncertainty in the markets.

Also I think some of this sell-off has to be attributed to how well Bernie Sanders has done so far in the Democratic primaries.  We don't do politics on this blog and when we discuss the subject at all it is in context of how it bleeds over into the economic realm.  From that standpoint I can say with a lot of confidence that markets won't take well to a Sander's presidency and he will be like a lead weight around stocks the better he potentially does in the coming months. 

An overbought market, coronavirus and Bernie Sanders are what I think are hurting stocks right now.  So what are my thoughts going forward?  First, I believe there is a high probability that prices remain vulnerable through the rest of this week.  The last sentence is a guess based on past probabilities and could obviously be wrong.  However, it would strike me reasonable that investors might at least want to see the results from the South Carolina primaries this weekend.  That could make stocks vulnerable today and tomorrow. Now I obviously don't know what will happen, but I want you to be aware of the potential for a few more bad days right now should they occur.

While economic conditions in the US will likely slow this year because of the virus, the underlying fundamentals here at home are still strong based on what we know today.  At some point that will put a floor under stock prices and some sort of bottom will be put in.  Whether that is today or a few days from now is unknown but there will be a point where equities are oversold enough and have created potential value that buyers will step in, if only for a trade.  It is possible we are closer to that point even now.  As such I am more inclined to start looking for value down here then trying to sell at these price levels based on my analysis of things.  Value is now being created but you may have to be patient before you see it pan out and the probability of more volatility is now higher than it was a few months ago.

From a money flow perspective we are now very oversold and we are closer to a major band of price support so that may help as well.  While I think it is possible we are nearing price levels where value can be found in the markets, I do think there is a much higher probability that stock prices have seen their highs for the year until sometime after the elections or at least until the point where markets sniff out who they think will win.  New highs in prices could be pushed out now into 2021 depending on the damage to the economy.  A period of  price consolidation after such a large move would be very much in keeping for how this bull market has behaved since 2009 and would likely set the stage for the next market advance.  I'll try to flesh out what this possible trading range might look like in a future post.

Obviously we're in a period of extreme uncertainty and in times like these some investors and many traders indiscriminately sell.  Like "Mad Money's" and CNBC's Jim Cramer, I subscribe to the believe that panic is not a strategy.  The time for indiscriminate selling was probably a few weeks ago.  Investors that want to realign their asset allocations will likely be better served to review their portfolios after the market's rally, which it some point they inevitably will do.  Again I will refer you to something I said in my last investment letter:

"Over the long-run stocks have produced above average returns for many decades but the ticket you punch when you buy into the markets is volatility.  On average stocks have a volatility reading of about 14%.  That means at least once a year stocks will likely decline on average 5-20%.  That’s something to think about after such a huge advance last year.  If you have a million-dollar portfolio and it’s all in equities or their related instruments then you should prepare for potentially anywhere from a $50,000 to a $200,000 decline in your investments at some time during the next downdraft.  If that gives you a pause at this point then we need to talk.  Just know when we’re down that 5-20% all of the investment media will tell you the world’s going to end from an investment perspective.  We came close to that in 2008 and it’s possible that one day in the future the investment world will end.  But it only gets to do that once and there’s still a higher probability that the next correction we see will be more of the same and likely a better period to buy equities."

I'll have some further long term thoughts on this hopefully next week.

*Long ETF’s related to the S&P 500 in both client and personal accounts.