Our Perspective on Recent Volatility

In a few short weeks, the financial markets in the US have experienced their fastest decline in history as CoViD-19 was officially elevated to a โ€œpandemicโ€ as it spread out of China, infecting populations around the world while triggering tremendous levels of panic selling in the financial markets. While data from earlier this quarter suggested tremendous strength in US economic conditions as economic growth began to surge prior to this event, the impact of containing the virus remains unknown. Given the heightened levels of uncertainty, the market reverted to a sell now, ask questions later mentality, indiscriminately dumping index funds and stocks regardless of their sensitivity to the outbreak. Based on history, this kind of reflex reaction to global health outbreaks has lasted anywhere from 2 weeks to a few months; as history also shows, however, these periods are always followed by recoveries that send the markets to new highs.

Governments worldwide are responding in force with fiscal and monetary packages meant to ensure the holistic security of their citizens- not just in health, but also housing, food, and financial- while also ensuring businesses can continue to weather a period of economic slowdown. The most effective courses of action to ensure the spread of the virus is curbed- quarantines and social distancing- are also ones that inevitably impact economic growth. But the response has been unprecedented and the message consistent: this will be temporary and the government will carry impacted industries and citizens throughout this crisis. Most encouraging is the proactive response being taken by governments to support their economies ahead of forced slowdowns. The amount of stimulus and support suggests that not only will the economic impact of public health actions be softened, but some economies may very well emerge with tremendous tailwinds from lower global rates, public infrastructure packages, and the forced adoption of technology which ultimately boosts economic productivity.

Discovering a market bottom in this environment will be a process, though one is likely closer than we realize. Most of the swift panic selling and deleveraging appears to have occurred, and while more fiscal stimulus may be needed, these actions will serve as a backstop.

Thanks to our economic evolution and innovation over the past decade, the US economy is better positioned to endure these circumstances than at any other point in time. US banks have never been better capitalized or more resilient, and with the Federal Reserve cutting capital reserve requirements, the banks will serve a critical function in ensuring liquidity to individuals and businesses who need it. The American consumer has been one of the strongest economic forces in modern history, and with the maturity of e-commerce and internet services markets, consumers are able to continue purchasing goods and services without leaving their homes. Technological developments have also evolved to allow businesses and organizations to continue functioning regardless of where employees are located, with cloud-based services and advanced telecommunication infrastructure enabling businesses to continue.  While this period will be volatile, it will also expedite the adoption of technologies that will ultimately accelerate our economic productivity in the future, presenting attractive investment opportunities for the decade ahead.

While we navigate the volatility, itโ€™s crucial to remember that- like economic growth- the incredible strength we entered this period with is likely only on pause, ready to resume once the virus is contained. Keeping that in mind, perhaps we can predict the most unprecedented aspect of this entire experience: the unprecedented opportunity for long term investors to accumulate high-quality companies at a fraction of their true value.

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