As the news of the coronavirus and oil price war continues to proliferate, there is continued concern of the effect on global economic growth. At the current rate of contagion some economists believe that an economic recession may be in our near future. Is that possible? And if so what will happen to the stock market??
The recent decline of global stock indexes reflects the underlying fear that economic growth will slow. The question is to what degree? So far stock indexes have fallen just past what we would consider normal correction territory - signifying a softer economy ahead but unlikely a recession. However, further declines in stock prices may indicate that recession is more likely. Should that be the case it is best to have less and different stock exposure.
Economic recessions bring about 30-50% declines in stock indexes and it’s been a long time since we’ve had a full blown consumer and corporate profit recession – but that doesn’t mean we have to have one now. In a weaker growth environment certain sectors, such as consumer staples, healthcare and utilities, hold up quite well while cyclical sectors, such as consumer discretionary, financials, industrials and technology, get hurt. In the coming days and weeks you may see us rearranging your portfolio to a more defensive posture to mitigate risk.
Today’s weakness and how the market trades in coming weeks should tell us more about where the economy is heading. Markets are discount mechanisms and significantly decline or advance preceding changes in the economy – so we will be watching this closely.
Should it look as though the market will fall much further than normal, we will reduce exposure to sectors that would be vulnerable to a recession along with reducing your overall equity exposure. As opposed to selling in prior years, we expect these changes to yield little or no tax implications.
It is difficult to know with any certainty how long the coronavirus will affect the economy. Initially we see signs of supply chain disruptions, dramatic slowdown in travel, and some companies guiding earnings lower for the next quarter. The loss of consumer confidence can create a self-fulfilling prophecy of a more difficult market. We also see a widening of credit spreads between high-yield and investment-grade bonds, which is not a great sign.
We are hopeful that medication will soon be available to stop the spread of the COVID-19 and eventually a vaccine. However, the timelines of these remedies are uncertain. As you know we stand prepared to manage the risk of catastrophic loss by adjusting your portfolio’s allocation to stocks, avoiding vulnerable and unhealthy sectors, as well as using carefully placed stop loss orders.
We hope this short update finds you well and if you have any questions about your portfolio, please feel free to contact us.
Periods like this can often be unsettling for friends or family. If you know of anyone who can benefit from our risk management strategies, please feel free to have them contact us at their convenience.
Your Team at Main Street Research