When market conditions become unusually disrupted, it warrants a communication with our clients and friends, we broadcast an email summing up what we have discussed and analyzed. This week those conditions became apparent on Monday morning, and today we’ll share what was sent:
We won’t try to sugar coat this morning’s market futures – they are ugly. It appears that the general market perception regarding coronavirus is that world governments (particularly China) are neither handing the problem well, nor are they telling us the whole truth. Only in due time will we know.
Our concentration is always on the outlook for the business environment and corporate profits, which have been doing very well. How much impact will ultimately be felt on Q1, 2020 profits is unknown. Some companies, such as Apple, have warned about their supply chains being interrupted, which will dent their operating results for the near term.
With a product-oriented company, the result will mostly be felt in delayed sales, rather than lost sales. Some service businesses, in particular, restaurants and bars with large international sales, will incur actual lost sales. Bottom line – there will be some impact on profits.
Looking at the positive side, Americans have been finding out (the hard way) that diversification in supply chains is as important as diversification in portfolios. Whether computer parts, generic medicines, or auto parts, one delay in the wrong country can interrupt an entire process. For decades now, components have been outsourced to the lowest cost suppliers around the world. This process was often supported by trade deals that heavily favored developing countries.
Changes had already begun when the coronavirus was announced. Production is being spread around, including bringing a large segment back onshore. Ultimately, the big winners will be us. Add to that process our domestic production of oil and gas, which has rendered the U.S. the largest producer in the world. We are finally energy independent, something I remember being promised back in the 1070s.
What will happen in the equity market today is anyone’s guess. Likewise, how long it takes for the market to attain another new high is unknown. In the interim, we look at the fundamentals, and we see strength. As upsetting as it is to see that about 80,000 people worldwide have been diagnosed with coronavirus, and over 2,000 have died, we also look at the flu, which affects about 120,000 Americans annually, killing about 10,000.
Our suggestion is to ride this out, even if a market correction occurs. After all, a correction is about a 10% drop in equities, and we have gains over the past 14 months far in excess of that number. Also, our portfolios have components of bonds, cash, and alternatives, which will not fall like the equities. Market volatility has been at an all-time low, spoiling all of us along the way. A return to regular, normal volatility will not necessarily feel good, but it will ultimately do good.
Should anyone feel that they will lose too much sleep, please call us to discuss. Otherwise, enjoy a good book and avoid the fearmongers. We appreciate your business and look forward to seeing each of you in the near future.
Adam and Steve
