We thought this would be an appropriate time to share our thoughts on the current state of the market and the impact of the COVID-19 virus. Unfortunately, we are dealing with an ever-evolving situation and it has been challenging to properly frame the state of the markets in relationship to this health crisis. With this in mind, we feel this is the time to let you know what we know and how we see it playing out. What a difference a couple of weeks make. It seems like it was only the middle of February and we were still basking in the blessing that 2019 had brought us. Many markets in 2019 were up over 30%+ and the economy’s economic run was getting ready to start yet another year. Clearly much has changed and now the entire world can’t stop talking about the novel COVID-19 virus outbreak and the doom that is apparently headed our way.
We would like to start by saying we are not infectious disease professionals or epidemiologists. That is not to say we have not been examining this issue in detail. It is hard to count the conference calls, professional conversations, emails and articles that we have listened, read and discussed since the first of the year. Did we come too far too fast last year? I think there may be some of that playing out as well. It has been repeated so often it seems trite, but we haven’t had a 10%+ correction in over a year. We have averaged one per year since 1950 and it is a natural and healthy component of our markets.Many of the experts are calling for a severe pandemic that will cripple the global economy. This seems to be fear mongering and we are not in that camp. While there will be a slowdown in the global supply chain, the good news is the majority of the COVID-19 virus cases appear to be quite mild. The situation remains fluid, but the COVID-19 virus will run its course. Already the number of cases in China is declining. China, which first reported an outbreak of the disease in January, though it had clearly been circulating since December, had just 44 new cases on Sunday. There were 28 deaths Saturday and 27 on Sunday, fewer than in Iran or Italy – almost all in Wuhan.
State of the Economy
Let’s put this into perspective. Prior to the arrival of the COVID-19 virus, the US economy had picked up steam this winter. Employment growth was strong and along with the growth in hours worked, we expected solid readings on manufacturing production and income growth in February. We actually saw some of this with last Friday’s strong jobs number. Next, the drop in mortgage interest rates is providing a refinancing boom at an opportune time. Mortgage loan applications for refinancing have surged 223% over the last year. Given the ongoing drop in rates, the refinance boom is poised to continue, freeing up household cash-flow. Additionally, and with the oil market selloff, lower gas prices will provide a tailwind to disposable income. For households, the drop in retail gasoline prices will likely push the growth in headline CPI inflation lower.
Bottom line: This is not a financial crisis but a public health issue. There will undoubtedly be fallout from this, but we do not have fundamental issues in our economy. When you review health crises from previous outbreaks like H1N1, SARS and MERS the companies and the economy have shown great resilience in their ability to adapt and deal with these types of public health situations.
What does this mean?
Our point of view is that this is a temporary phenomenon that will prove transitory in nature. One of the things we need to remember is how we got here. At Kimery Wealth Management, we take great care and pride in our investment process, due diligence and our unwavering insistence on high quality and best of breed asset managers. None of the asset managers in our portfolios are selected without an intense amount of scrutiny and investigation. Our portfolios are going to move with the market but are designed with market stress in mind. We are happy to say that they are holding up very well in the face of these strong market gyrations. We are not immune to market swings, but our conservative approach to client portfolio allocations provides us with a reminder that proper diversification has its place in everyone’s investment allocations. We know none of this may help in the moment, but we encourage you to remain resolute and positive as we
work through this. We have many reasons to be optimistic and are looking forward to a productive and healthy market in the balance of 2020.
We are here if you feel like you would like to talk through this, your situation or just discuss the current environment and how it may affect you.