Early Thoughts on Market Volatility in 2020

February 27, 2020

As of this morning, the equity market is down over 10% from its recent high, a correction by some definitions. As I have shared many times, corrections are unpredictable and come from unexpected, outside forces. While we don’t know the future course of the recent market volatility, was it really unexpected?

Rich Market
2019 was a very strong year in the stock market, up 29%, and the strength continued into January. While I shared that I felt the fundamentals of our economy were strong, we discussed that valuations were full and that 2020 was likely to be a volatile year simply because of the uncertainty of a Presidential election.

Presidential Election
This past Saturday evening, Bernie Sanders won the Nevada caucus. As a candidate he is publicly pushing proposals that worry Wall Street. His current move to the front of the long list of Democratic candidates was sure to rattle the markets Monday morning.

Over a week ago, Apple announced that its supply chain is being disrupted by COVID-19. I was sure this news would turn the market; it did not. As we are all reading, COVID-19 is highly contagious and spreads rapidly. Reports suggest that 80% of the people that catch the virus will have mild symptoms and the death rate so far is only about 2%- less than our flu. Sunday, we learned that Italy now has an outbreak.

New outbreaks not only add fuel to fears of a global outbreak, they extend the timeline for containing the health and economic effects of the illness. While some estimates suggest the virus has already peaked in China, markets now are considering longer-term impacts. Rex Nutting for MarketWatch explained, “Much of the immediate economic impact of a pandemic can be traced to the efforts to contain it, rather than from the effects of the disease itself. As we attempt to quarantine those who might spread the disease, we shut down a lot of economic activity.”

Declining Bond Yields
So now we add economic concerns to the market volatility too. Even as the market reached new highs in mid-February, bond yields were already declining. This week’s market volatility has pushed the 10-year U.S. Treasury bond to an historic low and again inverted the yield curve. Yes, we now are starting to hear the “R” word again- recession.

COVID-19 is scary, but it is not the only force that kicked-off the recent pull back in the market. We were already taking profits in full positions in your portfolio and fully investing in your gold, U.S. Dollar and bond positions for safety. So far, we have been protecting your principal better than the broad market. To my mind, the current “correction” still leaves the stock market in a very healthy position. We are watching carefully, adjusting portfolios where appropriate, and will even be ready if we see an attractive buying opportunity at some point.