Greetings!

What happened!?  The stock market went down since the last time I sent a note on February 28. We are still less than a month from where the Dow Jones reached an all time high on February 12 of 29,568.57.  At the end of the day today, the Dow closed at 23,581.02.  This represents a drop of 19.3%, which is very close to what is considered a bear market, or a drop of over 20% from a peak.  Today also marks a little over eleven years since the S&P 500 hit an intraday low of 666.8 on Friday March 6, 2009 and began its rise to close today at 2790.50.  We’ve come a long way since those lows.  It is helpful to put this long term upward movement in perspective to this very sudden drop.  Markets instantly react, sometimes overreact, to events to take into account the probability of future events.  At the moment, a little more than before perhaps, those future events are uncertain.  Longer term I still have faith in stocks providing the best return and the use of bonds in portfolios to help lessen risk.

I wanted to give you another update with three events that took place over the last week:

  1. The US Federal Reserve took the emergency step to lower interest rates on Tuesday March 3. On Monday, March 2, markets rallied, both as a relief to the selloff that took place February 28 (the last email I sent) as well as on the expectation that central banks across the globe would announce a coordinated effort to give a monetary boost to the global economy. The Federal Reserve took the emergency step of cutting the benchmark U.S. interest rate by half a percentage point. The U.S. central bank has not made a cut like this since late 2008, shortly after the collapse of Lehman Brothers. 
  2. Over the weekend, OPEC nations could not agree to a production cut in oil output, which caused prices to sink close to 30% overnight.  This lack of coordination creates further stress on the financial system, but also could produce a boost to countries and ultimately consumers through lower oil costs.  Markets sold off massively today on this news as concern now focuses on the ability for oil companies to stay in business.  With few exceptions, there was not a positive reaction in markets from large cut in the average consumer’s budget with the expected drop in fuel prices.
  3. Information flow and response regarding the COVID-19 outbreak – Response to the spread of the disease globally has been poor from the start, as China held back information about the outbreak initially and since then there has not been a well-coordinated global effort.  Italy had just two cases of COVID-19 on January 30, and as of March 9 has the largest number of cases outside of China with 9,172 and 463 deaths.  Containment of the spread instead of stopping the spread is now the reality.  Here in the US, we are now realizing and seeing our everyday lives are being affected by this outbreak.  Further bans on travel and events are likely to happen, whether done through a coordinated effort from the Federal and state governments or on their own.

From my view, in my contacts with you and other investors, sentiment has turned from one of optimism, and wanting to buy the dip in the market to one of pause and more concern about the future direction.  After experiencing the tech bubble in 2000 and the great financial crisis in ’08, I have yet to see this turn to a mood of capitulation or “throwing in the towel.”  I am not sure given the circumstances we will see this happen.  The economy is still relatively strong with low unemployment, low interest rates, and favorable conditions to keep these in place. In the two previous scenarios we had the events and fallout from 9/11 and the never-ending peeling of layers of our fragile financial system that washed out nearly every bit of negativity to form a bottom.  I do believe we’ve reached an end to the ‘buy the dip’ mentality we’ve seen for the last eleven years.  Each time the market dropped, it rallied only to move higher. With this event, the damage as well as the solution is still being played out. 

Your investments continue to be managed in the same defensively-postured manner.  I am beginning to make shifts to get more defensive, specifically finding areas that work well when stocks go down.  For clients you should start seeing these changes soon.  From a planning standpoint, this is becoming a great time to revisit your plan or start the conversation.  A suggestion to those concerned about losses recently – stay calm.  Don’t look at your statements until you first understand where you’re at with your overall plan.  For most of you, the financial loss means little in terms of a change to your lifestyle but reviewing this before seeing the numbers might help.

Finally, I wanted to share with you several observations in the markets right now:

  1. US Government bond yields are lower than the dividend yield on S&P 500 – This is a sign that stocks are cheap.
  2. The entire yield curve – yields on US Treasury bonds from short to long term – is entirely under 1%.  This is a red flag for the economy
  3. Oil saw its worst single day drop as price wars seem inevitable
  4. A history of emergency rate cuts done by the US Federal Reserve