T2 Asset Management

March 2020 Market Commentary

Well that escalated quickly! We found it to be quite the head scratcher a few weeks ago when this coronavirus popped up, and it seemed that the stock market couldn’t care less. Ah, the blissful times just 20 days ago when all news was good news and the market could only go up. What a difference a few short weeks make. Anyone with a working television is probably aware that the stock market has fallen nearly 25% in a very short period as the economic impact of this virus is assessed.

As the talking heads debate why or why not this might be a big problem, or a temporary one at best, we prefer to look at the big picture. We have been saying for quite some time that this market was on borrowed time. It has been very expensive relative to earnings, and global economies have been slowing. This was a market simply looking for a catalyst to kick off the selling, and it found a real doozy. Our economy has been solid, and the Federal Reserve has been supportive, but that good news was priced in two times over.

So where do we go from here? First, we need know where “here” is…

 

 

This is a monthly chart of the Dow going back to the start of the bull market in 2009. As you can see, despite the recent large losses, much of those bull market gains are still intact. Really, we have just gone back into the volatile range that we have been in for the last two years. Certainly no one likes to give back the gains they enjoyed from last year, but as we said, this market was on borrowed time.

The good news is that the economy is still humming along. For the month, Gross Domestic Product (GDP) came in at 2.1% as expected. Payrolls added 273,000, better than the 175,000 expected. Finally, retail sales were up by 0.3%, in-line with expectations. The bad news is that this data is from last month and is now completely irrelevant.

The continued health of this economy and the markets depend on the consumer reaction to this health threat. Your author just cancelled a planned spring break cruise, and all the money that would have been spent on the travel industry is gone. Many conferences and business travel plans have now been set aside. Will this just be a blip on the radar and gone? Maybe, and maybe we dip into recession as people just hunker down.

We had been warning for a while that investors should be moving to a defensive posture in their portfolios. We still believe that caution is warranted even as the market has now become a bit cheaper. We would advise selling a little more into the inevitable rallies. Once again not a panic. The really ugly markets come from banking crises and we do not see one unfolding right now. We may see some additional selling, but feel that a normal correction in the range of 20%-30% is most likely what we are looking at.

 

Disclaimer: Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of securities. Investments involve risk and are not guaranteed.