Global markets pushed the panic button on Monday as more coronavirus news appealed to investors fear of a significant global economic slowdown. The point decline was the biggest since “Black Monday” in 1987(WSJ), an event that occurred in my first full year in the investment business. This move into bear market territory has come fast and furious and to a large degree driven more by programs than long term fundamental thinking. The foundation of the drawdown is based on a vast uncertainty regarding not only the health of the populace but the dramatic impact “social distancing” will have on global economies. What we do know is that the United States has a highly diverse economy with solid underpinnings driven by innovation. At Logan Capital Management, we believe the full force of America’s innovation and technological capabilities are being focused on the coronavirus. It will be brought under control in due time. Unfortunately, the best we can do today as investors and as citizens is be patient and wait for the solutions to arrive and the virus to peak while we focus on our health.
Are We There Yet?
The coronavirus has been found to be highly contagious and to an unfortunate percentage, deadly. To “flatten” the rising curve of new cases most affected countries, including the US, have implemented policies focused on limiting human contact. These policies are certain to push the US economy into negative growth, possibly for at least two quarters or more. The economic data will appear horrific compared to recent history. What do we need to see the tide turn? First, seeing these efforts slow the virus leading to fewer new daily cases. It will also be comforting to see progress on potential therapies and vaccines being developed to prevent and deal with the onset of COVID-19. The advent of these two factors will help end the negative feedback loop. Secondly, the market needs increased liquidity and those businesses affected (retailers, airlines, cruise lines, etc.) need financial support. We think this is in process given the Federal Reserve rate cuts, ramping up quantitative easing and supporting key markets such as commercial paper. Regulators have also freed up more capital for banks to use to lend to their clients. Lastly, the market is looking for the “shock and awe” of a substantial fiscal stimulus program. While smaller bills have been passed already, a larger bill is in process that we hope will be passed soon that will include a massive injection of funds to businesses and individuals. In fact, the G7 leaders released a statement committing to “do whatever is necessary to ensure a strong global response” to the pandemic (Wolfe Research). When we can check all the boxes on these actions, then we will be a long way towards returning to a more normal stock market.
As painful as the drawdown has been, we are watching the road signs for historical signposts. Over the past 90 years, the S&P 500 Index has seen on average and median drawdowns of –35% and –28%, respectively during bear markets. Currently, the S&P 500 Index is down 29% from its peak in February. Event-Driven drawdowns (in contrast to Structural or Cyclical drawdowns) tend to recover within a year [Source: Goldman Sachs Investment Research, March 2017]. Valuations have dropped well below average and are supported by very low interest rates and certain dividend yields that are the highest since the financial crisis of 2008. While it is possible the market could sink lower on a failed fiscal stimulus package or a credit issue, but the weight of history and the limitations of the virus are pointing towards a bottom.
Given the data we see, the coronavirus and the resulting COVID-19 disease will be resolved by our actions as a nation and the innovation of our healthcare professionals. We urge clients to be patient and remember that panic selling is never helpful to a long-term plan of wealth generation. In fact, missing out on potential market rallies off the bottom can be very damaging. Since 1930, if an investor “sat out” the best 10 days of the S&P 500 Index per decade their total returns would be just 91% vs 14,962% overall (BofA/Merrill Lynch). So now more than ever, we suggest staying invested and riding out the volatility caused by the coronavirus.
We feel confident our portfolio of companies in the Dividend Performers strategy will remain resilient through the crisis. In fact, we see many great companies with strong competitive advantages, strong balance sheets and long and defensible track record of dividend growth selling at historically cheap valuations.
Logan Capital Management wishes all our clients and their families the best of health through this difficult time.
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value. This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gain