I hope this Atlas update finds you well and handling the situation we are all in constructively to the best of your ability. We at Atlas are carrying on, working to ensure that your assets under our care are prudently guided through this disruption.
The situation in the markets continues to be fluid. Last Friday, President Trump declared a national state of emergency. Also announced was a preliminary set of proposals and steps to help provide a safety net for certain segments of the population affected by the economic consequences of the coronavirus (COVID-19). Over the weekend, the Federal Reserve took several steps. First, they cut the overnight lending rate for banks to 0% – 0.25% (previously, the overnight rate was held in a target range of 1.0% to 1.25%). They also launched a $700 billion quantitative easing program, lowered the rate at the ‘discount window’ (a direct Fed lending facility for commercial banks) from 1.50% to 0.25%, and extended the term of those loans up to 90 days.
While these changes could serve to cushion the economy by providing an easier flow of credit to consumers and some businesses, on Monday the market reacted negatively. Only time will tell if the Fed’s actions are enough, or if more monetary policy moves are warranted. Some say that the Fed has done everything it can for now and that a powerful stimulus package is now needed. Critics of the actions believe that the Fed acted with ineffective gestures at the wrong time. Either way, it seems apparent that short term plans may provide a bump to the economy, but to re-ignite longer-term growth, a more comprehensive package is required.
This week Congress is working to develop what could be a massive fiscal stimulus package. Some are labeling this package “the bazooka,” after a much more modest aid package was announced last week. Reports are that it will be $1.3 trillion dollars in size. The Trump administration on Tuesday asked for $850 billion. If released, a package of this size could provide a market cushion, and possibly a floor for equity prices.
It is important to remember that outside of the coronavirus (COVID-19) issue, the U.S. oil patch is facing a battle with Russia and OPEC. After the weekend of March 8th, oil prices plummeted from the low $50’s into the $20’s now. This presents a challenge for U.S. oil production companies that have taken on a lot of debt to finance the build-out of the industry here over the last 10 years. This price battle will cost jobs and likely trigger debt defaults in the high-yield segment. The effect could also spill into the financial sector, causing harm to banks that were active in lending to that industry. While we do not see this as causing any widespread disruption to large banks, we are keeping an eye on the high-yield segment.
Given the shutdown of much of the U.S. economy… it is a foregone conclusion that the coming months will reveal that we are currently experiencing negative economic growth. As a result, we think that the possibility of the U.S. falling into a recession is elevated. What we’re most concerned with is how deep a recession it could be, and how long it could last?
At this point, we think that this could be an abrupt but transitory disruption. By that, we mean a negative growth period that begins sharply (i.e., now), but moderates as it ranges from the end of the 1st into the 3rd quarter. This outlook is built on the knowledge that we are currently experiencing disruptions on both the demand and supply sides, and discretionary social spending (restaurants, entertainment, etc.) has ground to a halt. So, our current outlook is for close to 0.0% GDP growth for 2020, with the economy falling sharply in Q2 and recovering in the third and fourth quarters.
We continue to think that the economy will withstand this. As for investment strategy, with the S&P 500 currently at about 2350, we’re considering changes to position for a market recovery that we think will begin before the worst of the economic news is revealed. With an eye toward 2021 corporate earnings, we expect certain areas to experience a sudden recovery in demand, while other areas linger. In accordance with our investment strategy, we’re giving particular attention to our sector weightings to position portfolios appropriately.
The speed of recent events in the equity markets has resulted in a very short-term focus for many individual investors. We understand that for some, emotions are magnified in times like these, and the tendency is to just stop the pain by exiting the market. However, experienced industry professionals understand that it is times such as these when we must look beyond the headlines and maintain focus on opportunities to not only recover lost value but to identify unusually attractive investments that have the potential to provide attractive longer-term returns.
We are in constant contact with our research and strategy partners and are working long and hard to ensure that our strategies are founded on reliable and insightful insights regarding how to navigate these markets. History has taught us that allowing fear to drive investment decisions and attempting to time the markets rarely if ever pays. On the contrary, over time patience and prudent asset allocation adjustments in a well-diversified portfolio have shown to help investors withstand volatility and position themselves for better returns in a market recovery.
As always, if you have questions about this or any other financial matter, please contact your Atlas Wealth Management Advisor.
John C. Ogle
Chief Investment Officer