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March 2020 Update

Now that the markets have two fires to fight (this time with oil), we wanted to provide some commentary so you know what our thoughts are.  

COVID-19 (Coronavirus)
Regarding the coronavirus, we are with the consensus that it will most likely get worse before it gets better. Our assessment of the situation, and based on historical precedence, is that it will be a short-term issue that will cause a brief economic slowdown and a slight hit to corporate profits in Q2 and Q3. However, it is not a long-term issue that will cause structural changes (i.e. 2008 financial crisis) and will not be a major factor to the global economy 24 months from now. The market (which reflects the collective knowledge of every investor in the world) is trying to look through all the data points and ripple effects the coronavirus is having on supply chains, travel and consumer demand throughout the world. No one knows exactly how severe and how far reaching this virus will be and what type of disruption it may have to businesses around the world. This lack of visibility for businesses and the economy is causing uncertainty which is the main driver of the market volatility.

Oil Shock
On Friday, OPEC+ (Saudis & Russia) couldn’t agree on a supply cut to come in line with the reduced demand for oil due to the coronavirus. In a stunning move over the weekend, Saudi Arabia announced that they would increase their production, flooding the markets with oil. This is a rare supply and demand shock (increasing supply at the same time as the demand is waning) which is causing oil prices to plummet. Saudi Arabia and Russia are essentially in a game of chicken trying to see who will blink first. This does cause more market uncertainty as geopolitical risks have increased. For the US economy, we do have more exposure to oil and energy as we have become an exporter over the last decade. However, as big consumers of oil, lower prices benefit US consumers with cheaper gas and travel, as well as lower prices of many manufactured goods. This is an interesting dynamic when you pair that with the coronavirus concerns and depressed travel arrangements.  The savings to the consumer will eventually win out with increased spending and consumption, giving the economy a boost (consumer spending represents approximately 2/3rd of US GDP).

This again is a short-term issue, because long-term, these prices do not support the production levels and will eventually come back to equilibrium. Oil prices will have downward pressure in the short term but will most likely be higher 24 months from now.  

Interest Rates
Interest rates continue to hit historic lows. It would be wise to review your existing debts and look to refinance in the next few weeks. A good rule of thumb for mortgage refis, if new rates are 1% below your existing rate, it is usually a good opportunity to refinance (assuming you will remain in your house for at least 3 years).  Note that banks are slow to lower their mortgage rates, so be patient.  

Bottom line, the US economy was strong heading into these issues. This scare will work its way through the system, and we will come out on the other side. Amid the volatility, we are working hard to decipher short-term impacts from long-term impacts and how it will affect the global economy and markets. Benjamin Graham had an old saying that “in the short run, the market is like a voting machine-tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine-assessing the substance of a company.” Ultimately, it comes back to corporate earnings and whether they will continue to grow or retract.  We feel like we have identified companies and managers that will be successful over the long run, and we will continue to identify the risks and opportunities within this market.

We have been preparing clients’ accounts for an inevitable pullback for the last 18 months by rebalancing stocks to bonds, reducing specific risks on the stock side and raising cash when appropriate. It is important to keep in mind that your personal long-term financial plans have not changed. This is stressful and the hard part of investing, but it is critical that you stay disciplined and be patient. Rest assured we will continue to make prudent decisions and changes to your accounts when necessary.  

We understand the market volatility and outbreak of coronavirus can cause concern and in some situations fear. We are here if you need us, so please don’t hesitate to call.

Your Red Door Team
This communication and its content are for informational and educational purposes only and should not be used as the basis for any investment decision. The information contained herein is based on publicly available sources believed to be reliable but not a representation, expressed or implied, as to its accuracy, completeness or correctness.

No information available through this communication is intended or should be construed as any advice, recommendation or endorsement from us as to any legal, tax, investment or other matters, nor shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction. Nothing contained in this communication constitutes investment advice or offers any opinion with respect to the suitability of any security, and has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient.

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