Disruptions and Decisions

March 13, 2020 | Nick Hamilton


I wanted to continue with a flow of information regarding recent events.

Markets continue to be disrupted by a growing number of fears but mainly around the Coronavirus as well as the de-stabilizing change in the price of oil last week. This latter issue was another unexpected event and risk which resulted with the lack of cooperation among OPEC members to decide on an oil production cut. This production cut was needed to offset the slowing demand for oil.  The resulting actions have quickly taken the price of oil down to the $30 range. There are long term positives with cheaper oil, but as an unexpected event the market views it as a negative and OPEC will need to resolve the matter in order to stabilize the prospects for energy producers around the world.

The best way to categorize both of these ongoing events is that they are clearly disruptions. Volatility is a bi-product to any disruption we have seen in the past. Markets become volatile as they try to ascertain what the impact will be to economics around the world. Despite the major headlines regarding a virus and dramatic decisions to contain it, there is nothing new to how markets will interpret the information. What is not at play here is a scenario like 2008 where Financial institutions were excessively leveraged to a failing housing market and Oil was priced at a high of $140 a barrel. Nonetheless, markets today are forced to digest 2 major disruptions right now which have compounded things.

I have attached some useful tools for your review which provides context and reference for the purposes of our ongoing strategy. At present, our research team believe the decline we have seen from the market highs of about -19% (as of March 11th) as something they are currently categorizing this as a ‘growth scare’. A growth scare is where markets correct but there is no actual view of it being a recession or start of a bear market. Some important facts and numbers: We have experienced 4 of these growth scares since 2010, averaging a decline of -17.7%. We last saw a decline of this nature to finish 2018 (market down -19.8%). When these disruptions and concerns abate (and they always have), in the ensuing 12 months, markets recover on average 30%.

There is obviously some risk of a recession resulting from these disruptive events. The efforts to contain the virus are affecting normal commerce all over the world as business gets suspended and interrupted in a number of ways. We all know these will be temporary measures. When looking at historical recessionary market corrections, they can be slightly deeper but the recoveries come in time with the first phase up often being fairly quick. At the end of the day ‘Time’ is the most important input when it comes to investing. I remain of the view that markets are overacting to the economic impacts cause by the virus. Governments are intent on providing relief and support which will translate in time.

I thought this information might be helpful as you seek to gain more context on recent events. If I can be of further help, please reach out to us.