Market Update: February 28, 2020

Earlier this week we noted that continued disruptions related to Covid-19/Coronavirus would drive our near-term decisions. As this week has unfolded, the spread of the virus has expanded and is at a point where overall economic activity for 2020 will be impacted. Our 2020 outlook, along with most market projections, did not incorporate the level of disruption we are now seeing across many nations. As such, we are adjusting our outlook.

Given the central role China has in global supply chains as well as their domestic disruption, global growth estimates for the first half of 2020 and year-end will likely be lower by 0.50% to 1.00%. Further, with Germany’s reliance on exports as a primary driver of their economy and its importance within the European Union, the EU region will likely experience zero to negative growth in the first half of the year.

These events will impact US corporate earnings. Already there have been a number of headline comments from large US companies adjusting downwards their 2020 expectations due to the virus. From travel to consumer products, we expect this trend to continue.

As we assess this situation, we accept our limitations with regard to the overall medical impact of the Coronavirus. We can, however, assess the economic impact of such a disruption. Our base thesis is a continuation of episodic infections, which will randomly impact large urban areas globally. As these occur, both business and consumer activity will be meaningfully impacted leading to decreased economic activity. That said, we also believe the impact will dissipate as monitoring techniques, response times and treatments steadily improve.

We continue to believe the US is best prepared to deal with this situation and while there will likely be near-term disruptions, the domestic market is best prepared for these challenges.

For our portfolios, earlier this week we began evaluating client allocations with an eye towards reducing non-US equity holdings. That process continues. At this point we are not adjusting our US equity allocations. We believe the underlying strength of the US economy, supported by active fiscal and monetary policy, will be able to withstand the overall impact of the Covid-19/Coronavirus.

Asset management in such times is particularly difficult. Our role is to temper emotion as history shows these issues are usually temporary. However, our role is not to simply say “let’s wait and see” every time there is a market dislocation. With this in mind, given the overall uncertainty related to the Coronavirus and the obvious impact on global economic activity, it is only prudent that we adjust our outlook and portfolio allocations in response.

As always, we appreciate your trust and welcome the opportunity to discuss our views in more detail.

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