We hope that you and your loved ones are continuing to stay safe and well.
As the quarantine continues and some restrictions are beginning to ease, we wanted to give our clients an update on Condor’s current work-from-home set up, our office plans for going forward, and our thoughts on the market.
The first quarter of 2020 was a difficult time for financial markets and the world more broadly. In addition to the medical toll, the sweeping pandemic known as the novel coronavirus, or COVID-19, and the shutdown it created shuttered small businesses, disrupted global supply chains, stunted demand for goods, and caused unemployment to spike. For the stock market, the result was a decline of 19.6% as measured by the S&P 500 Index. While the market did rally and rebound sharply in the quarter’s final two weeks, the first three months of 2020 still ended as the worst on record since 1987. Meanwhile, the CBOE Volatility Index, a common measure of market volatility informally known as the VIX, tripled before calming during the late-quarter rally. While no area of the stock market was immune from this broader selloff, healthcare, technology, and the most defensive sectors like utilities and consumer staples held up relatively better. On the other hand, the energy sector was by far the worst hit, as a March falling out between major oil producers Saudi Arabia and Russia sent oil prices plunging as low as $20 per barrel. Frustrated by Russia’s unwillingness to agree to production cuts, the Saudis vowed to price the Russians out of the market, leading oil markets to post their largest one-day decline since the Gulf War.
Updated February 24, 2020 Originally Posted on February 10, 2020
The current Novel Coronavirus, with over 75,000 cases and 2,600 deaths, has grown into a major health issue with a greater scope than the SARS outbreak of 2002 & 2003. Beyond the obviously tragic human toll, the virus’s spread has caused significant anxiety for financial markets as well.
Financial markets finished the year near all-time highs, wrapping up a
decade marked almost exclusively by bull markets. The S&P 500 Index gained another 9.06% in
the fourth quarter, resulting in an overall gain of 31.48% for the U.S. benchmark
in 2019. While it should be noted that
this stellar year came off a low base thanks to a relatively large market
downturn in December 2018, it still proved to be a year of strong economic
growth and multiple expansion, with markets resilient against trade and
political uncertainties. As was often
the case in 2019, growth stocks outperformed their value counterparts in the
fourth quarter, though the gap between the two did narrow in the second half of
the year. Healthcare and technology
stocks significantly outpaced many other sectors, while real estate and
utilities lagged notably. Small-caps
finished the quarter as the top performers, followed by large-caps and then mid-caps.
From time to time, we publish our
thoughts on current market events to provide clients with insights into these
events and how they relate to our investment outlook and their portfolio, but
we thought this would be a good time to provide our thoughts on volatility in
the equity market in general. Over the
years we have received questions on a wide range of topics, but at the end of
the day the question most people are asking is – I think something bad is about
to happen, should I sell my stocks? The
answer, if you are positioned properly heading into any market volatility, is
Much noise has been made about the U.S. yield curve’s
inversion with 3-month Treasury yields trading roughly around the same price as
10-year Treasuries. Pundits have been
quick to declare that a recession is imminent, citing similar situations where
the yield curve has inverted before recessions in the last 60 years. While it is true that the yield curve has
inverted before past recessions, it must also be noted that there were moments
of inversion that were not followed by a recession over the last 60 years as
well. There is also no accurate way of
timing when a recession might occur even after a yield curve inversion. The chart below highlights this:
I wanted to reach out to address the recent stock market volatility. For the past few months, it seems as if every news headline has been negative and while there are certainly causes for concern, there are some reasons for optimism. Before touching on this, I wanted to reiterate some of my comments from our last letter and discuss our approach to portfolio construction.
I wanted to take a minute to address the most recent bout of volatility in the market. Before addressing the causes for the recent downturn and providing our thoughts, it’s important to remind investors of the benefits of having a diversified portfolio. Different areas of the market will outperform at different times and it can be tempting to wonder, why bother holding asset classes that are not performing as well as others at any given time? The reason is that changes in the market happen quickly, much more quickly than changes in the economy and much more often. In fact, since 1980 the average annual intra-year drop for the S&P 500 is 13.8%, yet the Index has rebounded to finish the year positive in 29 of the 38 years analyzed and averaged an annual gain of 8.8%.
Today’s relatively sharp market sell-off is generating a lot of discussion around the impact of rising interest rates on financial markets. Although there are legitimate concerns that the Federal Reserve’s interest rate increases could reduce demand for relatively riskier asset classes like stocks and slow the economy more than expected, it is our view that these concerns are outweighed by other, more positive factors. Our outlook is rooted in the continuing underlying corporate and economic strength domestically, as well as a longer-term contextual view of why interest rates are rising in the first place.
Front and center in the news lately is the concern over Turkey’s currency crisis, with the country’s lira falling against the dollar by as much as 20% in one day. Last week’s downfall was led in part by President Trump’s doubling of tariffs on imported Turkish steel and aluminum along with continued heated rhetoric over an American pastor being held in the country. Couple this with Turkey’s authoritarian president, Recep Tayyip Erdogan, and his brash tone toward international and domestic policies, and you can see the idiosyncratic factors that sent the lira tumbling.