Investments Will Always Look to Fundamentals to Guide the Path of the Market

The picture below highlights key events that resulted in market drops since 2008 – ie “reasons to sell” throughout the bull run that spanned the last 11 years. As you can see there is always a reason to sell and panic but over time markets rebound. 


Events like the Coronavirus (COVID-19) or the price war on oil cannot be predicted. The important thing to remember is that investments will always look to fundamentals to guide the path of the market. When you have improving fundamentals and have an unexpected event, you can see there is minimal impact on the market. However, when you have an environment of deteriorating fundamentals then you can have sizeable impacts in the short term. There have been a lot of positive events in the news about our economy but with the benefit of hindsight, here are 5 signs that show the economy has been slowing down.  

  1. Meaningful slow down in US GDP numbers, below avg last 3 qtrs
  2. Leading indicators have been slowing down
  3. Corporate profit slowed to 5%
  4. CEO turnover was up 30%
  5. Liquidity is tightening specifically in the repo markets

The truth is no one can predict the markets and no one can predict a black swan type of event like COVID-19. But on this steep correction, it is clear that this backdrop of deterring fundamentals has been happening.   

Below you will find past global health crises and their market impact 6 months out. The COVID-19 is part of the SARS Family. Although the chart is slightly dated (published 2/24/2019), it still tells a good story of what to expect based off other global health crises. 

Corona virus (Strain family) or COVID-19(WHO abbreviation) or SARS-COV-2(official name)

This virus will be with us for a while. We have lost our opportunity to deal with this virus like South Korea did. A potential freeze on travel for two weeks may slow the virus but it won’t eliminate the case. And we are preparing portfolios to be defensive in nature to weather a season rather than a storm. As more people get tested, more negative press will come out. And as we get into earnings season, more missed cash flow estimates will continue. The virus is not causing the slow down. It is the corporate reactions to the virus that are causing fundamental change in behavior. On a backdrop of lowering fundamentals and no ability for business to test. Slowing the spread is extremely important for the stress we put our medical system through. However, we can’t have a complete shutdown of business infrastructure without the ability to test who has the virus and who doesn’t. That, I believe, is creating panic. We need the ability to get testing because if we don’t, then this will hurt a lot of people financially, especially those without work flexibility or an emergency fund. 

Phases of a Bear Market

Since we can’t predict what will happen. Let’s look at history to find what the highest probability scenario is.

Act 1: This was a black swan event that was maybe exacerbated by a weakening economic environment because there was no counter balance to the bad news. Another common theme you will hear is, “lets buy into the dip”, “this is temporary”, or “markets are way over correcting.”

Act 2. Shock to the reality that this is a recession. “Wow, this is crazy. No one could have predicted it would be this bad.” Markets continue to bounce around, however, we retest lows periodically.

Act 3: It feels like this will never end. We are in a new normal. This is a time of slow growth OR when data improves and people don’t believe the data.  

Final Thoughts

I believe any incumbent president will pull out all the tools to help the economy and their reelection chances. Interest rates are 4 steps from zero and the rest of the world already has negative rates. The Fed is adding money into the markets in several ways. Also, every day I think people will get some help to deal with the potential disruption to normal work life.  

Regarding investments that are managed by Client First Capital, we have systematically decreased equity exposure 2 times over the last year and rebalanced earlier this week. Because we follow a disciplined process and with BlackRock’s research, we remain focused on preservation of wealth through these volatile times. We are staying true to the strategy and action items to consider listed in our previous email. If you have any questions or concerns, please reach out directly to me. 

Just like the motto of the U.S. Coast Guard, “Semper Paratus”: We too, are ‘always ready’ to serve.