Good morning.
As most of you know concerns about the coronavirus have led to a sharp correction in global financial markets. Whether this virus is “not as bad as the flu” is irrelevant in the short-term, relative to the markets. Geographic regions overseas are being quarantined. Major events & conference are being cancelled. Corporations, to varying degrees, are restricting travel and asking employees to work from home.
This change in behavior is causing the global economy to slow down. How could it not? The S&P500 finished Friday down 12.4% vs. the all-time on Feb 19. This pullback has been the quickest drop from all-time highs in history. Clearly the markets didn’t see this virus coming. That doesn’t mean the markets aren’t over-reacting to a temporary slowdown in economic activity. We would consider ourselves in that camp.
This morning the Dow Jones Industrial Average futures are indicating the Dow will open down 1300 pts, which is very near the lows set on February 28th. The Saudis essentially declared an oil war on Russia yesterday, causing the price of oil to drop 20% overnight. The oil/energy sector had already been hammered and, this morning, oil stocks are getting decimated. For instance, Exxon Mobil is down roughly 31% year-to-date and is set to open down another 12% today.
It’s important to recognize this activity in the oil markets HAS happened before, specifically Thanksgiving Day 2015 thru February 2016 when oil fell to $26/barrel (from $80). There will be some positives. Gas prices should drop. Most companies use oil/energy as an input, meaning it will cost less to produce their goods, thus driving profits higher. That will happen eventually. However, today, in the oil sector, the news will center around layoffs, bond defaults, and stock declines.
This type of carnage in the oil sector is why diversification is so important. Do we have exposure to the energy sector? Of course. Are we over-weighted and/or will this volatility affect us long-term? No. Markets overshoot. Earlier this year the financial markets were arguably priced to perfection. We’re quickly learning the markets aren’t so perfect. This sharp pullback has allowed us to take advantage of lower prices over the last few weeks. Could prices go lower? Of course. Do we plan to buy at lower prices? Yes – maybe not today but, ultimately, there will be many bargains available.
We mentioned two weeks ago we saw the Fear vs. Greed index hit 3 on 12/24/18. At last Friday’s close it was at 6. Fear is rampant. This morning stock prices are back to where they were 10 days ago. It could get worse. The bottom line is times like these are not times to panic sell and let fear dictate your long-term plan. Times like these are opportunities. At the very least they’re opportunities to remind ourselves selling into a fear-driven correction is never a prudent option.
Finally, for anyone who worries about the equity side of the ledger, it’s important to ask yourself some key questions:
- Do I have a financial/retirement plan?
- If yes, then how much money do I need from my portfolio over the next 1-2yrs?
- Finally, is that “need” of 1-2yrs already in bonds and/or cash? – if it is, then this volatility in the stock market should not affect your long-term plans
Thank you. Please reach out with questions or concerns.
Sincerely,
Your LJI Team