Coronavirus Client Update

Coronavirus Client Update


Good Afternoon Clients, Colleagues and Friends,

As you are no doubt aware, last week was one of the worst weeks in the stock market’s history with the S&P 500 falling -11%, representing the largest one week drop since the global financial crisis in 2008. Today, Monday, the S&P rallied approximately 4.3% by market close, recouping much of last week’s losses.

In response, we wanted to take a moment to provide our thoughts on the capital markets and world economy, and provide some insight into what we are paying attention to and what we think matters most going forward.

What is Going on in the Stock Market?

First and foremost, the stock market is reacting to worsening news of the virus’s contagion.  As of this writing:

  • There are 89,000 confirmed cases worldwide, most in China
  • More than 3000 people have died (representing a fatality rate of appx. 2%)
  • The virus has spread to Europe, South America and the US
  • The first two deaths in the US occurred over the weekend
  • The virus has hit the San Francisco Bay Area

The reality is, if news continues to get worse, the market will likely continue to fall, and vice versa.  Conversely, high quality fixed income assets are rallying as investors flee to safety. Although the stock market isn’t the economy, it is a signal that investors are worried about the global economic outlook because of the coronavirus.  

As Mohammad El-Erian noted in this article, “This is a recognition that we have gone too far in terms of liquidity risk and credit risk, and that economic fundamentals have deteriorated.”  Market valuations were already stretched according to many metrics, and the economic cycle is inarguably closer to an end than a beginning, with the last recession occurring 11+ years ago.  

The very real fears triggered by the coronavirus and its immediate impact on the global economy are likely exacerbated by many investors’ existing belief that a correction was overdue anyway given the strong run-up we’ve seen since the end of 2018.  

Although the Fed is now expected to engage in a series of rate cuts in an attempt to alleviate the market free-fall, they may not have the intended or any effect.  Again, quoting El-Erian: “All it’s going to do is help balance sheets and give some minor relief to markets, but it’s not going to encourage people to travel. It’s not going to encourage people in China to go back to work. The only thing that will help financial markets recover is a medical breakthrough.”  

If the Fed cuts rates substantially and the market continues to fall, things could get a lot worse, as the historical monetary policy savior will be rendered publicly neutered.  

Will This Cause a Recession?

The question on everyone’s mind is: will this stop at the current market correction or will this cause a recession resulting in more severe market declines?  

Right now, the majority of the economic impact is isolated to China.  However China is the second largest economy in the world behind the US, and makes up roughly 17% of the global economy.  As such, we are already seeing supply chain disruption, a considerable slow down in travel and tourism, and dwindling product inventories and sales.  

The reality at this point is that just about any businesses that rely on China as part of their supply chains or have substantial retail presences in China, are going to suffer until this virus is under control.

As a result, analysts are starting to revise their forward earnings estimates downward, and on Thursday Goldman Sachs Chief US Equity Strategist indicated “US companies will generate no earnings growth in 2020…”

China’s estimated GDP growth for Q1-20 was approximately 6%, and analysts’ consensus is that number is likely to fall to zero, or lower, for Q1.  Eurozone GDP only grew 0.1% at the end of last year, so any shock to its system resulting from a slowdown in China could push it into negative territory.  The US has one of the stronger global economies at present, with Q4-19 GDP growth clocking in at 2.1%.  

If news worsens, and the current slowdown in global economies continues, we will see actual negative economic growth, starting with China, spreading to the Eurozone, and then ultimately to the US.  At that point, a recession won’t be far off.  

What Can or Should We Do to Our Portfolios?

In the event a recession occurs, or if news continues to worsen as the coronavirus spreads, we will very likely see the market go from “correction” (defined as a drop of 10% or more from a recent 52 week high), to a “bear market” (defined as a drop in 20% or more from a recent 52 week high).  

For context, the two charts below show every correction and bear market since WWII:

If you are a Three Bell private client, a good portion of your portfolio is likely already in alternative investments and/or fixed income, which have little to no correlation to the stock market and should act to buffer the downside effects of a stock market decline.

However, if you have substantial exposure to the stock market, via a concentrated equity position or otherwise, the below chart which illustrates the performance of the S&P 500 in the wake of other viral outbreaks, should offer some comfort:

As you can see, the market’s reaction to epidemics and fast-moving diseases is often short-lived.  For example, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002, based on month-end performance in April, 2003.  Just one year later, it was up 20.76%. Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus, and then subsequently gained 18.36% in the following 12-month period.

The chart below illustrates the return of the MSCI (global stock market index), with an overlay that marks the onset of each major disease.  As you can see, the market over the long haul has proven remarkably resilient to each pathogen.  

That said, the severity of the virus will ultimately dictate the market’s reaction, and just because major stock market indexes have historically managed to shrug off the contagion from past outbreaks, doesn’t mean that will hold true this time.  There is already mounting evidence from reputable medical sources that the coronavirus is flat out different from an immunological perspective, and thus this return data may not apply as much, or at all, this time.

Nevertheless, if you do hold substantial equity positions, at this point, it is best to manage them through the current crisis.  If it falls low enough, it may actually provide an entry point into the market that we haven’t seen in quite some time. To quote Buffet:  “Be fearful when others are greedy and greedy when others are fearful…”

Oftentimes, that is much easier said than done.  If you find yourself in that position, or you have any questions about any of the above, please don’t hesitate to reach out to us.  We are here to help.  

What About Three Bell?

In the event the coronavirus becomes a full blown pandemic, and the worst comes to pass with a 30%+ infection rate in the US, Three Bell is well-prepared to continue representing its clients though the crisis.

As many of you already know, Three Bell utilizes some of the most advanced technology available in its provision of financial services to its clients.  Every platform we use, from performance reporting to securities trading, is cloud-based, encrypted, and can be effectively utilized remotely.  

These systems are regularly remotely tested as part of Three Bell’s written business continuity plan, to ensure there are no disruptions in our representation of our clients or management of their portfolios.  If anyone, or everyone, is unable to make it to the office, it will have absolutely no effect on our ability to do our jobs effectively.

Moreover, Three Bell works as a true team for each client, with multiple advisors and operations personnel involved in every client relationship.  We have purposefully created redundancy across every Three Bell team member’s job functions, for every client, such that if one member of the Three Bell team fell ill, there are several other team members familiar with client accounts and can continue representation. 

Tactically, while we are not overreacting to the coronavirus, we are taking it very seriously, and proactively adjusting certain business practices.  First, we have banned all non-essential business travel for all personnel, in order to avoid major airports and potential contagion zones. Second, we are switching many of our in-person meetings in major cities to videoconferences until we have a better understanding of how bad this outbreak will be.  

In short, it is still too early and too close to call to understand what the ultimate impact of the coronavirus will be, but Three Bell is as well-prepared as possible and we will be here to help manage our clients’ finances during and after whatever comes next.  

If you have any questions or would like to discuss any of the above, please don’t hesitate to reach out to us and we will schedule time to connect.  


Jon Porter


Three Bell Capital

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