As we have communicated multiple times over the last week, the coronavirus  (COVID-19) has caused major uncertainty and disruption in the global economy.  The impact on the U.S. economy (and related disruption in our daily lives) is starting to be felt.

Our view has been that a U.S. stock market correction (10% or more drop) was likely, pushed by the coronavirus with a variety of contributing factors (record long bull market, late stages of the economic cycle).  The overall drop however would be controlled by reasonable valuation levels and the dramatic drop in already low interest rates, which is ultimately supportive of equity valuations.

In past pandemic health crisis situations, the markets typically show meaningful recovery over a reasonably short period of time.  However, over the weekend, the landscape changed.  Saudi Arabia called Russia’s bluff (Russia refused to go along with supply cuts to increase oil prices) and instead announced a supply increase in oil production leading to a massive drop in the already depressed price of oil.  Clearly this could not have come at a worse time for the global markets.  What was a controlled correction in the credit markets has widened dramatically today with the impact felt by the energy industry, banks lending to energy companies, and a variety of energy dependent industries.  Thus, we saw a major drop in the public markets today.

Coming into today, markets were essentially pricing in zero growth for 2020.  With Saudi Arabia’s actions and the change to the energy industry, the risk to this 2020 growth projection has increased.  That being said, neither Saudi Arabia or Russia can withstand $30/barrel oil pricing for very long.  Marginal costs per barrel of production are in the mid $40s for Russia and significantly higher for Saudi Arabia.  Someone is likely to blink.  With energy, bank and other related financial stocks repricing risk today, we are actively monitoring holdings and exposures to ensure appropriate levels of risk and we will adjust positions as warranted.  We continue to see our diversified, strategic portfolio approach, inclusive of non-traditional fixed income, low correlation alternatives and global allocation funds, as providing meaningful downside protection in difficult market environments.

We believe we are likely to see a public sector fiscal response in the U.S.  The market needs debt relief (zero interest loans as one example) for small and medium businesses that will have short term liquidity issues.  In an election year, it seems likely that we will see something of this sort as stimulus.  The stock market is now cheap relative to bonds.  In the very short term, panic has set in and value may be temporarily ignored.  However, as time marches forward, depressed valuations and a better risk-reward paradigm in certain strategies and asset classes will provide attractive opportunity.

We intend to keep updating you as market conditions and the economic climate evolve.  We understand that this is a trying time and the timing of the oil debacle, combined with COVID-19 fears, was the last thing the markets needed.  However, it is worth noting that the banking system in the U.S. is strong, and banks remain well-capitalized.  This makes the current situation very different than 2008.

Please call us anytime at 216-861-1148 or e-mail us at info@gries.com with any questions or to schedule a conversation.