The first quarter of 2020 was one of the most volatile in the history of the capital markets. No asset class was spared as a result of the Corona Virus which swept across the global population and its economies with “Blitzkrieg” speed, toppling people, businesses, the capital markets, and economies. It was an historic quarter in so many ways.
First, the stock markets reached record highs by mid-February, following a relatively flat January. There were rumblings about a virus roaming the streets of a relatively unheard of place in China, but like Avian (bird flu), H1N1 (swine flu), SARS, MERS and Ebola, this was a localized situation and couldn’t impact the rest of the world. Suddenly, reports from western European cities began to emerge of large numbers of citizens fighting for their lives after an attack by an invisible enemy. Within a period of three short but very volatile weeks, stock valuations had regressed to 2015 levels, the fixed income and credit markets had frozen, large portions of the population were heeding the “15 Days to Stop the Spread” and the Federal government and the Federal Reserve had taken the lead to save the economy, save jobs, and ensure that an already stretched thin medical system would not buckle under what was a geometric/exponential increase in Corona Virus cases that were beginning to flood their ICU’s.
Second, the actions taken by both the Federal Reserve and the Federal Government were based on data that, in our opinion, was suspect. British epidemiologist Niall Ferguson’s study which forecast over 2 million American deaths was, as he received more field data, downgraded to 200,000 people in the U.S. The World Health Organization has come under a withering attack that may well result in it’s being disbanded, over it’s fawning to the Chinese Communist Party (CCP)’s management of the Wuhan Virus outbreak. Given WHO’s leadership by a man who had previously been accused of covering up Cholera outbreaks in his own country, their data is suspect. Several other studies have emerged from academia which have led to conclusions that the virus may not be as damaging as originally thought. Nevertheless, data sources are critical to decision makers and those decision makers have been working overtime to cull through reams of data in order to make decisions that sustain America’s economic prominence.
Third, asset allocation has provided some shelter in a stock market which witnessed the major large cap indexes decline, at their nadir by some 37% in a matter of three weeks, only to rebound roughly 10% in the following two weeks. What we, at Alpha Beta Gamma Wealth Management were pleased with was the delivery of Gamma for those clients who have, over the past three years, added principal protected investments to their portfolios, primarily in the form of fixed and indexed annuities. By shifting investment risk to major insurance companies, many of our clients were able to avoid some of the jaw-dropping declines.
Looking forward now in early April, we believe that the “curve” is beginning to flatten, giving the medical establishment time to build a therapeutic approach to the Corona Virus, to stock medical facilities sorely in need of tools to fight this virus, and hopefully, for the development of a vaccine in order to develop herd immunity. As that happens, we believe that the markets will recover and that corporate earnings will move, once again, higher. We think that the massive stimulus provided by the Federal Government will flood the system in third quarter which should result in a strong recovery in stocks. Bonds remain a challenge, hobbled by low yields, imminent downgrades in the corporate bond world and liquidity concerns in their trading markets. Record low interest rates should promote economic growth and banks are currently awash with refinance applications for home mortgages. Real estate trends will, we posit, shift as a result of a population that has learned to “shelter in place” over the past six weeks. We believe that those most impacted will be small “mom and pop” businesses like neighborhood restaurants, local gyms, and other gathering places. We believe that many organizations will be reviewing their need for as much office space as they have had in the past. As a result, we think that there will be a discernible shift in the office real estate market, as there has been in retail space in the recent past.
Below is a chart from Fundstrat which we believe outlines a probable outcome of the capital markets through the balance of this year.
Finally, thank you for your confidence in allowing us to work through this historic period of events which have greatly impacted market volatility. Please feel free to contact us should you have any questions.
Curt Lyman, CEO