The unprecedented equity market volatility last week set the record for the fastest correction in U.S. history. The speed at which the Standard & Poor’s (S&P) 500 Index dropped from its record high, down to a -11.50% downside, was something that left market participants stunned. The catalyst for the downside was quickly cited as the on-going issues with the coronavirus and the inability to contain its spread. With cases now confirmed in nearly all continents, the threat has gained the attention of political leaders in a way that has spurred actionable steps to attempt to contain the spread of the virus. We learned over the weekend of confirmed coronavirus deaths in the U.S. and President Trump has assigned a special envoy to further carry out the U.S. response. Our internal assessment of the events last week is one of both excitement and uncertainty. We’re firstly excited because global equity markets are now on sale relative to their mildly overvalued status just a few weeks ago. We tend to think of such events as a gift for long-term oriented investors that have an ability to gain net new equity market exposure. We’re also excited because such events allow us to restructure the underlying risk profile of our equity strategies and gain a better long-term perspective. We do believe a recovery is likely over the next 12-18 months and it may be further amplified by a new secular economic growth cycle fueled by the historical tailwinds associated with presidential election years. Despite our excitement, however, such volatility cycles spur the question of whether further downside is possible in the near-term. The answer is yes, it’s possible. For long-term investors, however, the benefit of investing in such a cycle is to pinpoint stocks on sale, it’s not to time the market when it has bottomed (no one knows when that will be). Having undergone many such volatility cycles, our experience indicates that those investors seeking to time the bottom of the market are often leaving notable gains off the table. This is either due to emotional ties that are embedded in our human nature, which cause an elongated cash position in portfolios once the market has begun its recovery, or some other factor that is often not quantifiable. Stepping away from the optimism, it’s important to note that the state of uncertainty from the coronavirus, which was largely cited as the media culprit for the recent volatility, has not been resolved. Near-term supply chain issues are certainly possible, yet we have received no data to indicate a quantifiable effect that would allow us to gauge sentiment. We have stated numerous times in the past that uncertainty is always possible, yet risk is plannable. To have planned for the volatility that we just experienced would have meant reacting to a subjective non-quantifiable factor, a notion that does not fit well within a systematic and non-emotional driven investment process. We remain committed to such a process and stand ready to further take advantage of the current market environment, both domestically and on an international basis.
As it relates specifically to domestic equity markets, it’s important to note the severe disconnect that we have witnessed over the past week. Value and dividend-oriented equities, which tend to exhibit favorable valuation metrics and often tend to capture lower relative risk, have shown excess downside over the past week relative to the S&P 500. This has been a bizarre occurrence that does not fit the standard mold of such exposure. As we gauge such allocations across strategies on an on-going basis, we have taken advantage of such a disconnect and have added to certain exposures across our multi-strategy platform. We will continue to do so with a long-term mindset.
Edison Byzyka, CFA – Chief Investment Officer
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.
Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate