In this latest installment of our quarterly newsletter, we share our observations on the dramatic events of the first quarter of 2020 and our outlook for future quarters. Click here to go to the full report on our website. The following are a few highlights:
- The past several weeks have been difficult, and we know watching the coronavirus spread and the stock market fall is unnerving, even to long-term investors. We believe that an essential part of our work on our clients’ behalf involves remaining patient and disciplined in times such as these.
- The worldwide spread of the novel coronavirus and COVID-19, the disease it causes, has upended societies, with widespread restrictions on business, travel, and social interaction sharply reducing global economic activity and causing layoffs or furloughs of millions of workers.
- COVID-19 is not the only issue that has unnerved investors. In addition, an ill-timed dispute between Saudi Arabia and Russia over oil production, in which both increased output, combined with lower global demand to cause oil prices to plummet.
- The spread of COVID-19 and the oil price decline have rattled global markets. After rising through mid-February, the S&P 500 index fell sharply into bear market territory in March. Over the past month, we have seen some of the stock market’s largest ever one-day swings, both up and down. After eleven years, the longest bull market in history has come to an end.
- As jarring as stocks’ drop has been, we think it is helpful to put the recent pullback into perspective. The S&P 500 index currently trades at the same level as at the beginning of 2019, so it has essentially given back the huge gains from last year. Also, the S&P 500 index is still up over 285% since the depths of the financial crisis.
- In response to the outbreak, central banks and governments around the world have announced aggressive initiatives to mitigate the economic impact of the spread of the coronavirus.
- The Fed has so far cut interest rates to near zero, committed to buying as much government debt as needed to shore up markets, and announced unprecedented plans to buy corporate bonds, including the riskiest investment-grade bonds.
- Meanwhile, the U.S. Congress passed an over $2 trillion relief package that provides for direct payments to individuals, expanded unemployment insurance benefits for workers, loans and grants to businesses, and funds for states and healthcare providers.
- We believe the congressional relief package is vitally important and necessary to dampen the effects of the sharp drop in economic activity due to quarantines and lockdowns. We also expect there will be a need for additional support as the United States and the rest of the world continue to fight the coronavirus.
- The market is clearly anticipating more bad news, and it remains to be seen whether current valuations appropriately reflect future events.
- We are watching developments closely and monitoring the virus’s impact on the economy, the markets, and our clients’ portfolios. We have sold a few holdings that we believe to be most exposed to these issues, a move that raised additional cash for future investment and should reduce risk in our portfolios.
- We also expect to resume investing available cash after the market volatility calms down, since the shares of some high-quality companies that we do not own are now available at prices well below our estimates of their intrinsic value.
- We know recent market conditions have been stressful, and we appreciate your ongoing patience and confidence in our approach and stewardship of your assets.
The Edgemoor Team
The S&P 500 index is an unmanaged market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The S&P 500 index is discussed for comparative purposes only. The comparisons have limitations because the indexes have volatility, investment, and other characteristics that differ from the investment strategies of Edgemoor. Further, it is not possible to invest directly in the indexes.
