While our initial thoughts are clearly on the human toll of this pandemic, we wanted to send some commentary as we systematically think through the current environment and what it means from an investment standpoint. Below is a summary of our thoughts, which will likely continue to evolve as we have more data to process.
General Market Commentary
The volatility of the last few weeks is not unwarranted—the degree of the unknown here is significant and therefore the range of what it could mean to company earnings over the next 12 months is very wide. The concept of owning stocks is predicated on the idea that companies will generate earnings that will allow them to either return capital to shareholders (via dividends or share buybacks) or reinvest in growing the business—thus increasing the value of the equity-holder’s share(s). The inability to predict where earnings will be makes setting a value for a company (or a grouping of companies) very difficult.
- Goldman Sachs and JP Morgan both estimate that earnings will decline 15 to 20% this year—which would equate to total earnings per share of approximately $130 to $140 for the S&P 500 Index.
- As of the Monday’s close, the S&P 500 Index is down approximately 30% from its intra-day peak on February 19th, putting it firmly in the bear market category, which is defined as a decline of 20% from the high.
- The last bear market for the S&P 500 was at the end of 2018, though this correction feels very different because the factors seemed clearer and more typical 18 months ago (trade policy disputes and interest rate policy).
- Economic data has softened and will likely continue to do so in our opinion.
- According to the National Bureau of Statistics, China’s Manufacturing Purchasing Managers’ Index fell to 35.7% in February compared to 50% in January.
- While much narrower in scope, just yesterday we saw a record fall in the New York Fed’s Empire State Business Conditions Index—indicating a significant reduction in manufacturing activity in the state of New York.
- With consumption representing approximately 70% of the US Gross Domestic Product, the restrictive measures that have been put in place to hopefully contain the spread of the virus should have a material impact on the US Economy in the near-term.
- Policy makers across the world are taking actions to try and soften the economic blow from the slow-down in activity.
- For the second time in a month, the Federal Reserve made an emergency rate cut, reducing their target range to 0 to .25 percent.
- Treasury Secretary Steve Mnuchin announced over the weekend a series of fiscal stimulus measures designed to support businesses and consumers as they cope with the rapid reduction in business activity.
Portfolio Implications
Our portfolios are built to weather periods of volatility—diversification is a risk management strategy that involves holding a mix of assets that have different drivers of return and risk. Below is one way of thinking through the asset classes that make up a typically diversified portfolio:
- Aggressive Growth Assets: Global Long-only Equities
- Moderate Growth Assets: Hedged Equity and Private Real Estate
- Moderately Defensive Assets: Multi-Sector and Absolute Return Bond Strategies
- Core Defensive Assets: Cash and Investment-Grade Fixed Income
There are a handful of key takeaways to consider when looking at Matter investment portfolios through that categorical lens:
- Portfolios are exposed to the stock market volatility—though we expect some measure of outperformance from active managers in certain asset classes, psychologically it is still difficult to feel good that your managers are “only down 15%” even if the market is down 20%.
- There are quite a few strategies in our portfolios that diversify our return drivers away from purely the stock market.
- The Barclays Aggregate Bond Index, a measure of investment grade bonds in the US, was up a little under 3% as of last Friday.
- Within the high yield bond market, credit spreads have significantly widened, so nimble and multi-sector managers might be presented with opportunities to buy high yield credit at better prices than they have over the last 18 months.
- The HFRX Equity Hedge Index, a proxy for Hedged Equity strategies, was down 11.4% YTD through last Thursday, compared to global stocks which were down almost 24% over that same time period.
As we all know, markets reflect both fundamental and psychological sentiments. During times like these, in the absence of fundamental landmarks, psychology takes over and we see the extreme volatility of the last few weeks. Based on some of the forecasts we are seeing regarding the potential trajectory for infections and death tolls, it is increasingly likely that things will get worse before they get better. But we believe things will get better. While the current circumstances are very difficult, they do not materially impact the ten to twenty-year outlook we have for the investments we hold. Therefore, our recommendation is to look past the immediate and stay within our discipline of managing towards achieving your long-term goals and the policy targets that underpin them—which could soon warrant a rebalancing from defensive asset classes back into growth asset classes.
We will continue to reach out proactively as we learn more. As always, we appreciate the trust you place in us to manage your investments through these periods of volatility. Most importantly, we hope that you and your families stay safe and healthy and we look forward to seeing you all soon.
This report is the confidential work product of Matter Family Office. Unauthorized distribution of this material is strictly prohibited. The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations. The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report. Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available. Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment. You are solely responsible for any decision to invest in a private offering. The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document. There is no guarantee that the past performance of any investment will continue in the future.