Market Insights

There is a popular finance book by Nassim Taleb titled “The Black Swan” that will most likely shoot to the top of Amazon’s best seller list over the next few weeks. The book focuses on the extreme impact of rare and unpredictable outlier events and the effect they can have on all aspects of life, markets included. The cascade of events that have unfolded over the past few weeks have been historic in a way that most would like to forget but all will most certainly remember. What started as a viral outbreak in China has metastasized into an unrelenting avalanche of shocking headlines and unprecedented actions, both in the markets and society. The markets response to this uncertainty has been as swift and disorderly as any time in history.

Back in 1987, right after the infamous “Black Monday” decline (which took the Dow Jones Industrial Average down by 22.6%), the cover of Barron’s featured a suitcase with two frightened eyes of a panicked investor peeking out of its dark recesses and an arm reaching out waving a white flag of surrender. Selling immediately after Black Monday would have been a mistake and buying immediately after would not have yielded any long-term value. The right decision was to “Stand There” and collect the necessary information and make an informed decision.

The dominance of a handful of the largest companies in the market, as measured by the S&P 500, is dramatic. Scott Minerd, Guggenheim Partners CIO, said last week, “I have never in my career seen anything as crazy as what’s going on right now. We are in ludicrous season.” Some might say these comments are a little over the top, but just look at one of the extreme situations that Scott is referencing.

The Coronavirus has grabbed the world’s attention in a major way. The outbreak in China hit a new plateau on Tuesday with the number of confirmed cases exceeding 20,000 with more than 420 deaths. For the time being the market impact has been controlled, in part, by massive capital infusions from the Central Bank of more than 240 billion over the last several days.

2019 was a party for stock investors. Most equity asset classes broke double digits with many exceeding 20% gains for the year. HCM equity portfolios fully participated in the fun. But, don’t let the calendar year spotlight fool you.

Of all the one-line investment mantras investors have followed over the years, none would have made you more money than the little ditty in the title. As I have described it to clients before, the Fed is essentially an organization with unlimited funds to influence markets and doesn’t care if they make money. Their expressed purpose is to strategically inject liquidity into the financial system with the hopes of facilitating economic growth. Another term to describe this activity is “Quantitative Easing” (QE). Since the Great Financial Crisis, there have been 3 “official” rounds of QE and a slight variation termed Operation Twist. Most would consider these programs a success, but not necessarily for their stated goals of accelerating economic growth. The stock market has been the biggest winner since the first round of QE was introduced in December 2008. During that same time, both GDP growth and inflation have held steady near 2%. This gap in growth rates has led many analysts to the conclusion that QE is the ultimate stock market steroid.