4/22/20 Market Notes
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception” – George Soros The sharp sell-off in oil continued on Tuesday, pressuring stocks lower as well. The Dow Jones Industrial Average lost 631 points (2.67%), while the S&P 500 was off by more than 3% and the NASDAQ declined 3 ½%. On a sector basis, Healthcare and Communication Services were the worst performers, while Utilities and the Energy sector held up the best with a 1 ½% loss. The energy sector is down more than 45% year-to-date, making it the worst performing sector so far this year. Gold prices levelled off slightly, but are up nearly 2% in overnight trading, while the U.S. dollar has stabilized at the top of its recent trading range. Treasury yields fell yesterday, as investors thought out save haven assets. Overnight oil prices fell a bit more, but are now well off their lows. As a result of over production and a steep drop off in demand, the world is running out of places to store oil, which is why prices are plummeting so sharply. The underlying concern is that with such overcapacity and low demand, it will take a long time to reach a supply / demand equilibrium again. Meaning that low oil prices could be here to stay for a while. This is particularly problematic for a number of countries, including Russia, who need Brent Crude prices above $40 per barrel to break-even (Brent is currently at $20). From an investor’s perspective this is also very problematic, as it is almost sure to cause companies like Exxon Mobile (XOM), Total SA (TOT) and many others to cut or eliminate their dividend, which had been one of the principal reasons to own these stocks. Furthermore, many smaller producers will likely go out of business, further pressuring economies during these already unprecedented economically challenging times. In spite of the volatility and market gyrations, there are bright spots that we shouldn’t ignore. In cities like New York, the worst of the coronavirus crisis seems to be over, as discharges from hospitals outpace new admissions. Moreover, several clusters of states, including New York, New Jersey and Connecticut are working together to smartly and gradually reopen segments of their economies (I for one look forward to a proper haircut). From an investors perspective there are green shoots as well. Netflix (NFLX) posted terrific earnings, as did several other companies. And while the gains and good news isn’t universal, a clearer picture is emerging as to which companies could thrive in the ‘new normal’, and which are likely to struggle or possibly go under. As we continue to monitor events, review portfolio structure and make sensible changes as prescribed by our disciplined process, we are confident that when this all passes, people will return to work, economies will once again grow and smart investments will pay off.
Disclosures: This market commentary is written by the 1879 Advisors® and represents the views of 1879 Advisors®. This commentary is not investment advice and should not be used as a basis to make investment decisions. Please consult with your registered investment advisor before making any investment decisions.