Equity markets sold off in February as Coronavirus fears dominated the headlines. The S&P 500 index fell -8.2% on the month, including a peak-to-trough decline of nearly -16% over the course of just 8 trading days for the fastest correction on record. Overseas stocks also struggled, with the MSCI ACWI ex-US Index falling -7.9% in February. Traditional safe haven assets held up well, with the Bloomberg Barclays US Aggregate Bond Index rallying +1.8% and gold prices gaining +1.6% for the month. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have lost -4.1% in February.
Before diving into key data points, it’s important to remember a few axioms of successful investing. The first is to remain calm while others are panicking. Panic leads to irrational decision-making and ultimately poor outcomes, both in the investing sphere and in the rest of life. Times like these also speak to the importance of having a plan and sticking with it. If you’re an investor focusing on long-term outcomes, now is not the time to change course and move everything to cash. Nor is it the time to mortgage your financial wellbeing on speculative investments to try and make a few extra bucks.
Finally, our tried and true investment philosophy relies on evidence over opinion. We are all entitled to have opinions about how this global health situation will resolve itself, and we at Archetype are certainly hoping for the swiftest of resolutions and health and safety to all. That said, we will let the hard data guide our investment approach, which so far points to a relative calm despite volatile trading activity and alarmist news headlines. Notably, in the past month we have had no changes to any of our Three Dials, which are summarized below:
1. Market Sentiment and Momentum: Positive
In less than two full trading days from the February 28th low, the S&P 500 staged a stunning +8.2% rally to recover its long-term support level. In the aftermath of both the SARS and Zika outbreaks, markets saw double-digit declines similar to what we experienced over the last week of February, and in both cases, stocks fully recovered within a matter of months. While history never repeats itself perfectly, the most recent buying strength suggests that long-term momentum remains intact, which leaves our Sentiment Dial in a “Positive” reading for the time being.
Global economic data continues to look strong despite the plethora of negative headlines. The most recent durable goods orders showed +3.6% growth ex-defense in January, an important sign that most businesses are proceeding as normal. February’s ISM Manufacturing report pointed towards optimism despite an anticipated disruption in the global supply chain. JPMorgan notes that no US industry relies on China for more than 20% of their inputs, and high levels of current inventory should help defray any delays in production. More importantly, less than 4% of S&P 500 revenues are exposed to China directly. In sum, the economic landscape remains healthy enough that our Fundamental Dial remains in a “Positive” position.
An overheated stock market likely contributed to the swiftness of the most recent selloff. While valuations broadly declined in February, most metrics suggest that stocks remain historically expensive. As such, our Valuation Dial remains in a “Negative” position.
On balance, our Three Dials composite reading takes a “Cautiously Optimistic” stance through the end of February. As always, we are monitoring developments closely and will communicate any updates promptly.
Sources:
https://www.schwab.com/resource-center/insights/content/will-virus-outbreak-lead-to-market-breakdown
https://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1
https://www.jpmorgan.com/jpmpdf/1320748198501.pdf