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From the Desk of Bob Centrella, CFA:                                     
February 27, 2020
 
 
"Thoughts on the Market and the Coronavirus" 
 
 
Good Morning,
 
With the recent and continuous downdraft in stocks, I thought it about time to send out my thoughts on the coronavirus and its market effect. We’ve seen the stock market drop for 6 straight days now (counting today) wiping out the gains from earlier this year and now moving to a loss. It seems that as the news on the virus is updated investors consider the news and then decide to sell. Much of the selling is algorithm or program driven by machines. I do not sense that everyday investors are selling much but there is selling, and it is constant. Markets are now officially in correction territory of down 10% from their highs and the S&P is down 5% for the year.

At some point we will get a bounce up but from where it will happen I'm not sure. The "buy the dip" mentality is still there but nobody wants to catch the proverbial falling knife. I can safely say that historically, all these negative events have eventually passed, and markets have recovered. I am confident in saying it will happen again, but the timing is uncertain. For the long-term, we still want to own stocks but the long-term is made up of a series of short-terms and some of those short-terms can be painful. Is the market overreacting? Some of the selling seems to be near panic levels but that is what happens – shoot first and ask questions later. The market tends to go further down (or further up) until a tipping point is reached. After 6 days of selling, we may be getting closer to some buying coming back into the market. We are now back to a level in the S&P 500 where we were in November 2019 at 3,038. Technically there is support at 3,000 so that is the level to watch.  

I have not been selling or buying as of yet. I continue to monitor stocks and portfolios and am looking at which companies might be most affected by supply and demand disruptions. Changes I make are more likely to be swaps where I sell a company and buy another that has become more attractive. We did a similar thing at the end of 2018 to nice results when stocks recovered last year. Look for quality companies and move up in quality at a good price.

The flight to safety has been dramatic with the 10-year Treasury Yield now at 1.24%, a historic record low from almost 1.6% just a week or so ago.  Gold and silver are rising, and oil has dropped below $50 a barrel. With rates this low, investors are pricing in a few Federal Reserve rate cuts and a possible global recession. What we have is the fear of the unknown.  Look for the Fed to possibly make some comments to help sooth the market.

Not to downplay this, there will be economic repercussions. Travel and tourism are hurting.  China, the world’s second largest economy, has basically come to a standstill. Supply chains around the world are being disrupted. US companies are beginning to announce that earnings will not meet expectations due to the virus -- Microsoft and Apple have recently done so among many others. Any recovery is likely to take a while, not be a V-shaped recovery. On top of it all we have a political battle going on with Democrat candidates and leaders harshly criticizing the Administration and Republicans firing back. Can’t we all just get along?! We have a potential crisis here and our politicians need to come together for the good of the country – I know, pipe dream.

So, what's to like - it sounds pretty dour?  In summary, as usual now is not the time to panic. We've been through these panics before and seen recoveries.  As a reminder the US economy was in a good position just a few weeks ago.  So this is happening from a sound economic base. The fear is that the virus spreads into the US and the market has another big leg down and the economy weakens. Fear is the biggest deterrent to the market.  Investors hate fear.  Especially fear of the unknown.  Perhaps the market is already discounting this which is why the selling is so consistent for now. I will continue to monitor what’s going on out there and decide whether to make some portfolio changes. And if this looks like it is getting worse, then I may raise some cash.  I still believe that this will not turn into a major downturn in the economy. This is not a financial crisis and our banks are in much better shape than they were in 2008. At some point, this will pass and when it does we want to be invested.  Markets sometimes look for a reason to correct.  Unfortunately, it took a health crisis for this correction to occur.  I had a correction baked into my 2020 forecast, I just didn't expect it to happen this way.  It is still early in the year and we have time to recover and our goals and objectives for the long-term have not changed.  

If you have any questions or want to talk feel free to send an email.

 
 
Bob 


 
  
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Bob Centrella, CFA
Managing Partner
Forza Investment Advisory, LLC





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