Well, does anyone miss last year yet? 2020 has certainly gotten off to a wild start. From missiles flying between Iran and the US in the Middle East to an entire continent on fire in the midst of a heatwave and a rapidly spreading virus that has shut down borders, you could be forgiven for looking over the horizon expecting to find the Four Horsemen of the Apocalypse.
Surprisingly, January was a non-event as far as North American equities are concerned. Heading into the month, markets were running higher on the belief that the signing of the US-China trade deal would bring about a recovery in emerging economies, which would help boost global prospects. Ultimately, the market ended flat under the cover of record earnings from the tech sector despite some obvious pockets of pain.
We are just starting to understand the full impact of the Coronavirus and what it will mean for global growth. The longer people are told to stay home and factories are shut, the harder it is to say there won’t be a hit to both supply and demand. Some markets priced this in very quickly, notably in commodities, where copper fell 10% and oil declined 15%.
Energy investors’ heads must be spinning. In two short weeks, oil moved from a spike over $65/bbl on Iranian threats to below $52/bbl on demand fears.
Yields fell in the bond market, reclaiming much of the recovery seen at year-end. The benchmark US 10-year Treasury yield moved from close to 2% to finish around 1.5%. The yield curve is flattening back to levels close to what was seen last summer, which brought about recession fears.
We don’t see any signs of a recession this year in North America as the economy is close to full employment and fiscal stimulus has been ramping up. Heading into a US election, the expectation has been that no corners will be cut in attempts to keep the economy firing on all cylinders. What makes this slowdown unique is that it can’t be as easily solved with a tweet from Washington.
With this uncertainty, the CBOE Volatility Index (the VIX) has reawakened to get back over 15. Investors had become complacent into year-end and nobody could have predicted the black swan event of a virus derailing global growth expectations. One month into the year, and so far, calls for an increase in volatility have proven accurate.
It’s much too soon to know what the overall impact of a shutdown in China will mean for markets and global growth. Past virus scares have proven to be an excellent buying opportunity, but there are no points for being early. Markets fear uncertainty and this is an example of an event not in the models.
Earnings season is broadly unfolding as expected; however, the headline numbers have really been skewed by the performance of large tech firms.
The market entered the year overbought and setup for a correction. So far, equities have weathered the storm very well. Will February be a return of the narrow momentum market of last year or will it prove to be a time to rotate to the oversold cyclicals that have priced-in the worst-case scenario?
We’ve seen some similar themes play out early this year: a flattening yield curve, falling rates and tech leadership, to name a few. While this market undoubtedly feels long in the tooth, it’s hard to make a definitive call about when it’s going to end.
Ideas with Purpose
Purpose Structured Equity Yield Portfolio – Stability is a feature that many investors covet these days. It’s impossible to know which headlines markets will fixate on and, as we’ve seen in the past month, things can turn quickly. Purpose Structured Equity Yield Portfolio has successfully delivered on its mandate of delivering a stable 6% monthly distribution while protecting capital with its contingent downside buffer.
Purpose Tactical Asset Allocation Fund (RTA) – Tactical asset allocation is the classic method of protecting a portfolio against broad declines. Doing it manually requires paying close attention to the markets. That task is made even harder when there are so many factors affecting market direction. RTA automates the process with its systematic, rules-based model that can quickly move from risk-on to risk-off when the market turns sour. It’s a simple way to add some security while ensuring you keep most of the upside, should markets chug along.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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