Broker Check

The Depth of Uncertainty Has Grown Once Again

| March 10, 2020
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The on-going coronavirus issues that have recently plagued the global economy appeared to take a minor break during the week as its effect on global equity market activity did not materialize with a similar fury as what we experienced in late February. This isn’t to say that the fears and uncertainty subsided; rather, it seemed [for a few days] that investors’ risk assessment may have been one that recognized the immense oversold conditions. Although global equity markets did not finish in positive territory on Friday, the last-minute rush to push prices higher proved encouraging to us because it showcased a desire for investors to hold equity market exposure throughout the weekend. Or, stated differently, it showcased that investors didn’t attempt to fully favor a risk-off sentiment, a notion that can often foreshadow positive equity market activity in the weeks ahead. Unfortunately, however, that was not the case. For many of you reading this right now you have already experienced the tremendous downside volatility that has been caused by the oil market related news from Sunday, March 8th. Saudi Arabia and Russia have waged a price war that may lead oil prices to as low as $20 per barrel, according to commodities analysts at Goldman Sachs. The global equity market eruption to the downside on the news has been one of historic proportions and, to us, it has also been tremendously puzzling. The U.S. energy independence story has been known for quite a while now and the fact that lower oil prices tend to help many industries, especially those in manufacturing, should be a positive effect of such news. Since we’re certainly not seeing anything positive, this begs the question of how this has become a complete bombshell announcement, an inquiry that may likely answer itself over the coming weeks. We would categorize the equity market volatility as completely overblown and driven primarily on the premise of uncertainty, which is further fueled by the inability to quantify the potential impact of the oil market’s new price war. We remain highly convicted that the environment to enter equity market participation, or to further increase your exposure, is now. Global equity markets are now on sale and we urge caution in attempting to pinpoint the bottom. The goal is to strategically enter the market when opportunities arise, not to perfectly time the bottom. Such an act is often impossible and may be more detrimental if equity prices sharply recover to the upside.

Our assessment of favoring equity market exposure over the long-term is grounded in objective analysis. We have yet to truly see cracks in the U.S. economic foundation that would substantiate an elongated risk-off environment. Even in the event of a recession, which is something we have extensively discussed in our previous commentaries, we believe global equity markets have already priced-in the volatility. This isn’t to say that more downside isn’t possible, but it simply suggests that the depth of the recession would have to be utterly worse than expected for global equity markets to remain as is. Manufacturing data released during the week showed a surprisingly strong non-manufacturing services sector in the U.S. while data tied to vehicle sales surpassed estimates. The overall manufacturing sector continues to remain in expansionary territory, and we learned that an additional 15,000 jobs were added to that segment in February. In total, the February labor market report revealed a total of 273,000 new private jobs alongside a lower unemployment rate of 3.5%. The labor force participation rate remained unchanged at 63.4% while hourly earnings (wage growth) did not fall below 3%. Additionally, overall consumer sentiment data has not yet signaled distress signals to the point that they may suggest a true economic downturn may keep activity depressed for the foreseeable future.

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

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