“I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.”
The March 9, 2020, equity market opening saw a virtually immediate drop of 7% for the S&P 500 causing the first circuit-breaker market close since futures were halted during the 2016 U.S. Presidential election. The market sold off heavily based on continued coronavirus fears, but gained significant negative momentum from the developing oil price wars. Crude oil has dropped to similar levels during the 2008 and 2016 market lows of around $30 per barrel.
Rates have continued to fall with the 10-year Treasury hitting a new record low of 0.35% overnight. This is a mere 13% of the yield versus one year ago (2.64%) and miles away from the 4.49% long-term average. For perspective, the 10-year ended 2019 at 1.92% and was 1.56% on February 19, 2020, before the market sell-off. The safe-haven run continues with investors fleeing perceived risky assets. The U.S. Federal Reserve remains accommodative with the New York branch boosting short-term lending amounts to satisfy rising demands and avoid further strains on the banking system.
The S&P sits right at the typical correction level of -20% from the market highs that were just reached a few weeks ago. While the sell-off has affected all areas of the market, we are now seeing a price war for oil and the continued fallout from coronavirus. Energy has been punished as a result and is down more than 10% today. Over the weekend, Saudi Arabia instigated a price war with Russia sparking the biggest decline in the price of oil since the Gulf War in January of 1991. This has raised concerns about heavily indebted energy companies in the high yield market.
Market downturns occur more frequently than people think. Market corrections (a decline of 10% or more) happen about once every year, according to S&P 500 data from 1950 through 2019. While a bear market correction (a decline of 20% of more) typically happens every six years, our last occurrence was in December 2018 or a little less than 15 months ago. As we have previously discussed, the market has powered through past viral outbreaks such as SARS, Avian flu, Swine flu, MERS, Ebola, Zika, etc. While there was typically a relatively short-term negative reaction at first, the markets have usually come back rather strong. The one caveat to the comparison of previous outbreaks with COVID-19 is that the market rebound came once there was evidence that the growth rate of the contagion had credibly peaked. There is now some evidence that the measures taken by China have been impactful. If these efforts can be replicated in other parts of the world, it may go a long way towards calming the financial markets.
The oil price wars that started over the weekend have upped market volatility. The VIX broke 60 today a move of over 40% today alone! This is a similar level to February 2018. The current situation is compounded by potentially reduced demand from a slowing economy (and one affected by reduced consumption because of less travel and demand from China), as well as a global economy that may become flooded with a glut of crude oil. One positive note, this will likely reduce prices for consumers and businesses at the gas pump.
For most investors, the decline in U.S. Treasury yields has been a positive for their fixed income returns in 2020. On a year-to-date basis through the March 6 market close, the Bloomberg Barclays Aggregate Index has returned 5.71%. With stocks, as measured by the S&P 500, down -7.67% year-to-date through the same time-period, a 50/50 investor would have an approximate return of -0.98%. This simply reinforces the importance of diversification and keeping market volatility in perspective.
There are many factors driving market behavior including large unknowns and general fear. The capital markets have withstood crises of the past and we view this time as largely similar. While each market sell-off has some uniqueness, they share one common ending. There is pain in the market; the ultimate question is how long this pain will last and when will the solution be found?
While the specific date and time are difficult to predict, we encourage investors to maintain their long-term goals and objectives.
This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete. Any projections, targets, or estimates in this report are forward looking statements and are based on ZCM’s research, analysis, and assumptions made by the Adviser. Other events, which were not taken into account, may occur and may significantly affect performance. Any assumptions should not be construed to be indicative of the actual events that will occur. Actual events are difficult to predict and may depend upon factors that are beyond the control of ZCM. Certain assumptions have been made to simplify the presentation and, accordingly, actual results will differ, and may differ significantly, from those presented. Some important factors which could cause actual results of our strategies to differ materially from those projected or estimated in any forward-looking statements include, but are not limited to, the following: changes in interest rates and financial, market, economic, or legal conditions. Nothing contained in this commentary may be relied upon as a guarantee, promise, assurance, or a representation as to the future.
