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A Bull No More

Rather quickly the investment environment has soured. It was only a few weeks ago that many investors were feeling very bullish. Riding on the coattails of a tremendous 2019, most Wall Street predictions were for a continuation of the 11-year bull market. What could possibly bring markets down? 

Fast forward a few weeks and the recent market volatility makes it seem like the world is about to end. While the world won’t end, the 11-year bull market did end. The amount of greater than +/-3% move days over the last couple of weeks is remarkable. While sentiment can change on a dime, and overreact at its peak or trough, it is important to look past the fog and focus on the real economic impacts. 

Bear Market

Impact on Business
The new coronavirus outbreak will certainly have an impact on American businesses. As I wrote two weeks ago, the impact could go two different ways. The first, even if the coronavirus outbreak did not hit U.S. soil, disruptions to global supply chains would make it hard for businesses to produce and distribute the products that they sell. This was the best-case scenario. The second scenario was if the outbreak did hit our soil, and under this scenario businesses would close, events would cancel, and people would practice social distancing. 

Unfortunately, today we see the latter scenario playing out. Many businesses are instituting a work from home policy (as we already have at Allegiant) and some retail stores are closing. Even with retail locations temporarily closing, this doesn’t mean all business is stopping, thanks to online shopping. Many can weather this storm for a while without dramatic impacts, but some will find it difficult. If the U.S. follows the path of China, these shutdowns will last for a few weeks and then hopefully businesses can start returning to more normal operations. 

What This Means for GDP
Interestingly, the impact to 1st quarter GDP may not be as great as one might expect. While some spending has been postponed, other spending has been pulled forward. Look no further than the scarce shelves at your nearest grocery store. The panic buying of toilet paper, paper towels, cleaning supplies, etc. will help lift the Q1 number. While some of today’s purchases would not have occurred without the coronavirus, others only amount to private stockpiling to build inventories. Those inventories will be depleted at a later date, in lieu of new spending. This means we are pulling forward spending from the 2nd quarter, thereby creating a headwind for the 2nd quarter GDP number. 

The Allegiant Investment Research Team expects GDP growth to weaken over the coming quarters. Whether or not the U.S. enters a recession depends a lot on the timing of these economic impacts and the length of shutdowns. It will take months for the economic data to update, at which point investment markets will have already moved. Rarely are we handed a scenario where we can easily assume that data will weaken before we actually see the data. But the spread of the coronavirus provided us with that unique scenario. That is precisely why Allegiant acted to reduce risk in our models before much of the data started to come in. 

This Too Shall Pass
While we expect the news may get worse before it gets better, at some point this will pass. Markets are pricing in a lot of uncertainty, which is appropriate at this time. However, as clarity sets in and headlines stabilize, investors will find many opportunities to buy high-quality businesses at great prices. As Benjamin Graham, the father of value investing, famously said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Investors who are willing to accept short-term volatility will be rewarded with long-term success. 

It is impossible to always time the exact top or the exact bottom of a market, but the steps we have taken over the last year have been in preparation of an eventual decline. Even still, it is always uncomfortable to see prices decline. We believe your portfolios are well prepared to not only weather the storm but also to take advantage of some of the opportunities that will naturally arise. 

At the same time we have prepared your portfolios, Allegiant itself has prepared for times like this. As the world starts to pull back, Allegiant has stepped forward and taken action to add even more expertise to our team in the form of an experienced Investment Analyst who will soon join the firm. Rather than shrink away in fear from doing what’s necessary, we chose this time to continue investing in resources to best serve our clients, helping ensure that as uncertainly increases and opportunities arise, we are even better equipped to help you along your path. 

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal

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