Market and Virus Update

Confirmed cases of COVID-19In the last 7 trading days the equity markets (S&P 500) has fallen -10%. In terms of a market movement in a specified time period this is the largest since 2008. In market technical terms a 10% drop constitutes a “market correction”. What the market is experiencing called a “Black Swan” event which is defined as a shock to the markets based on an unforeseen event that would be considered rare. The good news is this 12% market correction comes off all time market highs set in mid February. Let’s put these last few sentences in context to overall market returns. The S&P 500 is up +5.19% in the past 6 months and +8.57% on 1 year basis despite the down movements over the past 6 days. We have been busy fielding calls and emails on whats next for the equity markets and what should be done as it relates to investing. Lets break this down a bit.

Coronavirus ( Covid-19)– This is the event that has spooked the markets globally. Very few market indices, countries, sectors and individual equities have not seen price depreciation. Of exception is the bond market, which has rallied on an increased demand for the safe haven asset class. As a firm that specializes in bonds the asset class has performed, as it has for the last 100 plus years, which is predictable even during times of stress. The chart below caught our attention, and while we have no idea on the medical aspects of this event we can say with certainty that markets will be impacted if coronavirus cases continue to spike. This is something that will need to be watched as a correlation has been drawn between cases spreading and market pressure to the downside.

What could happen to my investments if the Virus spreads? The virus in only 6 trading days has caused some of the largest U.S companies to already guide their earnings lower for Q1 and Q2. Examples of this in the past few days have been Visa, Disney, Apple and Alcoa. Continued and real coronavirus disruption would eventually reflect in the financials of the U.S fortune 500 companies, as well as those in the Russell 2000 etc. Impact to these companies current and forward earnings would be a drag on a companies subsequent equity prices. In the U.S we are already seeing heavy pressure on travel related companies and the transport sector. If the virus spreads rapidly in the U.S we will see financial impacts throughout the economy as the U.S consumer pulls back from spending. Consumer spending in the U.S comprises of 70% of U.S GDP.

What can we do to protect our investments?  Every client portfolio we manage is customized based on clients age, risk tolerance and goals. So we can not just say these 3 or 4  steps need to be taken to find safety.  Portfolio management and managing the risk in and around it focuses directly back to your asset allocation. Re-balancing to appropriate percentages of equities, bonds, cash and (private equity) is the key to long term growth and effectively managing risk. The obvious moves of shifting into a higher percentage of bonds, cash as well as certain private equity offerings can offer protection and will naturally be part of any conversation. As a client of the firm you are already aware we have deep experience and use of bonds and private equity in our portfolios with readily access to these two important asset classes. We will be setting up client meetings in our office, and calls with each investor over the next week to discuss your current holdings and appropriate asset allocation going forward into the rest of 2020.

In conclusion, we are watching markets closely and your positions even closer. As events unfold we look forward to having individual conversations as related to your investments and making adjustments that are warranted.  Please feel free to reach out with any questions and we look forward to continued work ahead.

Jim Etten
Copper River Advisors

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