Update #3

It has been a challenging couple of weeks to say the least. In the face of heightened government restrictions and forced closures (as Governor Northam announced yesterday in Virginia), even the most resolute investors have found themselves wavering and pondering fairly ominous “what if” scenarios. It is a natural thought process and one that will likely only increase in fervor as the virus crescendos to its peak and the economy slows in lock step.

In our conversations over the last week, many clients have simply wanted to know if there is hope for the markets. While this note is lengthy, we wanted to share a little hope as well as some cold hard facts:

If one assumes that the spread of the virus follows a course similar to that of China, then an end to the turmoil may arrive more quickly than a preventative vaccine.

  • 90% of Starbucks have re-opened in China and no new cases of COVID-19 have been reported in the last 5 days in Wuhan.

  • YUM Brands (KFC and Pizza Hut) relayed that 95% of stores are now open in mainland China.

  • On its earnings call, FedEx noted that

  • 90% to 95% of large manufacturers in China are now back to work in some capacity. Closer to 65% to 70% of small businesses in mainland China are coming back to work from a manufacturing perspective.

  • FedEx flew 246 flights in and out of China last week, which is aligned with normal flight schedules. In the past couple of weeks flights have been full and have registered record load factors intra-Asia, especially with Guangzhou hub.

  • Several therapeutic medicines are providing some encouraging signs for healthcare experts.

  • Every market panic has been caused by something that was completely unexpected and different. That’s why there was panic. It is only in hindsight that we realize it too would pass (and usually convince ourselves that we actually knew it would). In the moment, a statement such as this may feel like a disingenuous platitude, or even denial. It is not. We genuinely believe the world will recover. The market is forward looking and should begin its path to recovery in advance of the economy. The only question is when and how. In the meantime, the following paints the picture of where we are today.

The U.S. Economy is expected to contract significantly over the next two months.

  • Initial jobless claims increased by 70,000 last week and are expected to jump considerably (maybe even shockingly) in the weeks to come.

  • Consumption and business activity is rapidly declining, most notably in travel, leisure and consumer durables.

  • Small businesses and companies with sizable debt will likely be the first to feel the blunt force of a contracting economy.

  • The gears of the economy are further slowed by government enforced restrictions and closures.

  • Real GDP fell 3.25% in the “Great Recession” (2007-2009). It is expected to fall far more in this slow down (Goldman estimates 7%, the dotted red line in the chart below); however, the return to previous peak GDP is also expected to be much quicker (estimated at three quarters as opposed to six to seven quarters after last recession).

Equities are down significantly with volatility at an all-time high.

  • As of Monday 3/23/2020, the S&P 500 (a basket of the 500 largest publicly traded U.S. companies, often referred to as “the market”) was down 31% year-to-date and 34% from its high.

  • Ten of the last twelve trading days have seen moves of at least + 4% (with extremes of 12% on the downside and 9% on the upside, including today).

  • Equity markets have offered nowhere to hide and some sectors have performed particularly poorly, namely Energy (down 61% year-to-date) and Financials (down 43%).

  • Energy has been faced with a perfect storm of sorts (massive oversupply exacerbated by the Saudis and lack of demand created by COVID-19 limiting travel and consumption).

  • Financials are facing 0% interest rates.

  • As you can see in the table below, the pace of the decline of this bear market far exceeds past bear markets. The market dropped 30% in a record 30 days. After COVID-19 peaks, we could see an equally rapid bounce in the markets.

In general, bonds have outperformed equity and provided much needed cushion and support.

  • As of Monday, the Bloomberg Barclays U.S. Aggregate index (a basket of investment grade, fixed-rate taxable bonds, often referred to as the “Bond Market”) is flat year-to-date (i.e. returning 0%).

  • Pockets of the bond market have performed relatively poorly and experienced volatility, illiquidity and price dislocations (e.g. certain corporate bonds, municipal bonds, and commercial paper).

  • The Fed has taken fast and dramatic measures to maintain liquidity in the markets and encourage their proper functioning.

While we would love to chart the course and exact prescription for recovery, without the benefit of prescience, our firm must continue to lean on our experience, our discipline and our understanding of each client’s individual situation to guide our most important decisions. Valuations for high quality companies are certainly much more attractive than they have been in recent history, so we are actively researching potential new holdings, and evaluating your portfolio in the context of your goals. As shared in our last note, we also continue to look for opportunities to manage gains and losses in taxable accounts.

Please do not hesitate to reach out to any member of the Alpha Omega team with questions. Our names and numbers are below. We want to be there for you when you need us most.

Richmond Office:

Craig Forbes, CIMA®, 804-955-1601

Clay Hilbert, CIMA®, 804-955-1602

LeAnn Mitchell, 804-955-1603

Clement Teden, 804-955-1604

Chris Milligan, CFA®, 804-955-1605

Everett Reveley, CFP®, AIF®, 804-955-1606

Bill Noftsinger, 804-955-1607 (temporarily forwarded to Clay)

Elizabeth Wiertel, 804-955-1610

Shenandoah Valley Office:

Holly Ruff, CFA®, 804-955-1612

Carl Lind, CFP®, 804-955-1614

Eric Fitzgerald, CFP®, 804-955-1615


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