The views expressed below are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written on the last page of disclosures and are subject to change at any time. They are based on our proprietary research and general knowledge of said topic. The below content and applicable data are in support of our views on said topic. Please see additional disclosures at the end of this publication.
THE CURRENT MARKET ENVIRONMENT
The State of the Situation
Over the last three weeks, the markets have faced heightened volatility with many benchmarks down over 10% from recent highs.1 Moreover we saw circuit-breaker levels come into play over the past weekend. We have seen an impact on the markets stemming from uncertainty over the spread, the containment of COVID-19 virus, and the resulting economic impact. This is truly a black swan type of event for the markets.
U.S. companies have encountered financial impacts to their supply chain, decreased sales in China, and a falloff in demand for commodities like oil. While we are seeing conditions in China and Korea stabilize and improve, the virus is spreading elsewhere. Here in the U.S., we are still in the early stages of containing the virus. We believe the proactive effort by U.S. companies, schools, and government will be beneficial in the long run – even with short-term disruptions to businesses and day-to-day routines.
Unexpectedly over the weekend, the Organization of Petroleum Exporting Countries (OPEC) met and made the decision not to extend oil production cuts. This means that come the end of March – Saudi Arabia and Russia can start pumping as much oil as they want, driving the price of oil down. Price of oil below $40 per barrel is not sustainable for U.S. oil producers.2 We believe some U.S. producers may go out of business or be acquired as a result of the crude war, causing selling pressure on the energy sector.
The Federal Reserve
Last week the U.S. Federal Reserve “Fed” stepped in and made an emergency 50 basis point cut to interest rates. We expect that the Fed will continue to do more to support the economy with additional interest rate cuts and potentially more bond buying. Other central banks are expected to step in and provide support as well.
In the face of heightened market volatility, we are taking continued measures to protect client portfolios. We have been working diligently to increase cash in client portfolios while opportunistically adding high quality stocks on lower valuations.
While the market volatility is unsettling:
- This is not like previous market down turns in the sense that most parts of the U.S. economy have been relatively stable going into this time period.
- We have historically low interest rates and low oil prices, which should be stimulative to consumers and companies.
- With this level of volatility it is not uncommon for the markets and companies to have a sharp upside reversal. We are already seeing what we believe to be over sold conditions in some companies.
The most difficult part of market volatility can be to stay invested through the turbulence. However, we have seen the benefits of staying invested over the long-term before. Typically, the S&P 500 has an approximate 12% pullback at some point in a given year, yet on average the market is positive about 70% of the time.3 Not missing out when the markets recover can be crucial for clients.
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