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Going into the second half of January we were getting ready to write how relatively calm and upbeat things had been since our previous letter. Sure, we had impeachment. Sure, we had the Democratic pre-primaries and the concerns about what might happen if one of the ultra-progressive candidates (Senators Sanders and Warren) became the nominee. (Yes, it’s early). We had Phase One of a trade agreement with China, with many wondering what that really meant, whether it was the first step in a meaningful pact or just a time-buying charade. And sure, we nearly went to war with Iran over President Trump’s targeted assassination of Iran’s popular second-in command and Revolutionary Guard commander, Qasem Suleimani. That was frightening, shocked the markets for a couple of days, and probably isn’t over, even though Iran seems to have eschewed a major reprisal, and even though Iran came away with its own new problem with its accidental downing of a Ukrainian jetliner. And more North Korean threats are on the horizon, though few probably believed they were ever really gone. Brexit is finally in place as of January 31—what it will really mean will not start to become apparent until next year, since the old rules are still in place this year.

Despite all that, we’d had two and a half months of major gains, low volatility, and a gradual restoration of something resembling a normal yield curve. Through January 17—essentially mid-month—the S&P 500 was up about 10% from its October close, particularly notable for its bounce back from the Iran situation.

Then came the coronavirus. It’s always the thing you don’t see coming that hits you hard, although some might say that the hygiene in Chinese livestock markets had been another disaster waiting to happen ever since
SARS in 2003. But these things are impossible to time. As word spread of more cases, investors removed some risk from the table which drove markets down in the final trading days of January. Throughout most of
February, the markets have been engaged in a tug-of-war between solid earnings (notably Apple, Amazon and Tesla) and increasing coronavirus worries. Until February 21st, earnings and economic news were winning the battle as prices pushed to all-time highs. Equity markets declined over 1% on Friday, February 21st and then the sell-off continued through the end of February with a brief respite on Wednesday the 26th.

With the vicious selloff at the end of February, by month end the S&P 500 was down 8.23% in February and down 8.27% year-to-date. The selloff included multiple days declining more than 2% in the Dow, and the S&P 500. The 10-year Treasury yield fell to 1.10% by month-end after spending much of January in the mid-1.80’s, and ended the month yielding less than 3-month Treasury bills, though 26 basis points above the 2-year Treasury (We discussed the yield curve in last quarter’s letter). This was part of a nearly 2% gain for February in bonds.

Until coronavirus kicked in, things had been going remarkably well, to the point where analysts were starting to worry if we were headed toward bubble territory. November took off like a rocket (nearly 1%) on Friday, November 1st, with benign employment numbers and the tailwind of a Fed rate cut the previous Wednesday. From that point it was mostly full speed ahead for the month, with 14 up days to only 6 down ones, and a gain of 3.6% for the S&P. The down moments involved concern that the Phase One deal with China could be pushed back, a downcast report from Home Depot and a report that when the Fed cut rates on October 30th it had seen risks to the economy as “elevated.” But these were not nearly sufficient to keep the market from its appointed course, especially with a “Merger Monday” that featured eBay selling StubHub for $4 billion to Viagogo (nice sale—eBay had paid just over $300 million some years back), NVS buying Medicines Co for $9.7 billion, Tiffany selling to LVMH for $16.2 billion, and TD Ameritrade and Schwab confirming a previously announced $26 billion deal.

December was much the same, with only six losing days of 21. It actually started poorly, with a weak ISM Manufacturing report and more concerns about the Chinese trade deal. Moreover, President Trump hit Latin America with some new tariffs. But by December 12, the tone was positive for Phase One with China and the market was making new highs. The S&P 500 ended the year up 29%, NASDAQ gained 35%, and China’s CSI300 was up 33% after a bad previous handful of years. (CSI300’s losses would, of course, return in January).

The expected effect on global GDP growth from the coronavirus ranges from 0.2% to 1% reduction in previous estimates. The sectors hit hardest are technology, semiconductors, transportation and natural resources/commodities. The coordinated efforts from governments and organizations around the world have been greater than previous disease outbreaks. This caution led to closed factories and decreased travel and
tourism. While the economic effects will likely not push us into a recession in 2020 many pundits feel this risk has risen to the forefront of investor’s minds causing an emotional reaction and sell-off.

Moving ahead, what will an election year bring, coming right after a year where, as it has often been written, “everything worked”? Few analysts expect returns as good as 2019, but most think the likelihood of a 2020 recession is substantially less than it had been. One sage notes tongue-in-cheek that the Chinese Year of the Pig (2019 was one) has historically brought the best returns while the year of the Rat (2020) tends to bring far more modest ones.

We remind investors, as always, that a long-term strategy is far better than trying to time the effects of world crises and near-crises. After all, the past three years provided substantial annualized returns just below 10% for the Dow and S&P 500. Bonds have earned just over 5% annualized for the past three years. The very times when things seem most scary are usually the best times to stick with your plans.

(Sources: Morningstar, Bloomberg, The Wall Street Journal,,, RefinitivLipper).

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