MARKET Update: 03/23/2020

This market update was recorded on March 23rd, 2020 at 9:30 A.M.

Automated Video Transcript

Good morning, I’m Allen Gillespie, managing partner of investments here at FinTrust Capital Advisors. Here with the market update for the week of March 23rd, 2020.

As we begin this week, obviously, equity markets around the world have been off sharply over the last few weeks due to the coronavirus outbreak and at times like these, I think it’s important to try and understand both what’s going on and kind of where do things fit in a historical picture and what different market players or thinking and trying to accomplish at the same time. So times like this morning, my favorite books to kind of always revisit is Triumph of the Optimists 100 years of global Investment Returns. It was put out a number of years ago as well as my Wall Street History Book, which covers all the Wall Street’s history fact. Even prior to the 1840s and 50s when we were building out railroads.

So at times like this, obviously it’s been abrupt adjustment. When you look through the books, essentially what you will see is only breaks around war times. World War One, World War Two, The Civil War. Very significant breaks.

So in a nutshell, what we’ve had is kind of the equivalent of a hurricane, but it’s been nationwide. It’s been global, set multiple countries, multiple locations. So in that regard, very equivalent to the outbreak of World War, and in fact that’s the client in the equity markets is right on par with outbreak of World War One, World War Two. At those points in time, it’s important to realize that part of what markets are trying to price in is that the economy we had before the event and the economy that we have after that will be substantially different and so things that might have worked in the past won’t necessarily work in the future, but they’ll be opportunities in the future as companies sort of reorganizes as capital reorganizes to produce the goods and services that will be demanded on a go forward basis.

Now I think that’s one of the difference is kind of an thought process if it’s more like a hurricane, then people might come back to the same types of businesses and you would see the pent up demand that people are speaking about. If it’s more like a war event, then I think the economy we’re on the cusp of a transformation could be three or four years were essentially there’s a retooling in the global economy. So as just in time supply chains from China. For example, being the hub of 80% of pharmaceutical manufacturing. We may realize that’s not such a great idea. Let’s bring that back. Let’s localize that.

Some of the other big changes that I think are pretty material that are going on in here: Germany finally is easing up on some of the budget restrictions. That’s been a problem in Europe. They’ve been trying to fund themselves without a federal debt market in the United States. We have federal debt and we have local and state debt. They’ve essentially been operating on a municipal debt system, so they either need to consolidate their debts given the situation, or go ahead and break apart the European Union to allow countries to go their own way. That’s kind of what happened in the 30s when countries left the gold standard, but we do see evidence that they’re trying to issue a eurobond to address the situation specifically, in Italy, because there’s no way that country is going to be able to hit its budget requirements. So we actually see that as a positive coming out of the event.


Essentially economists are looking at GDP or gross domestic product is a combination of consumer spending plus business investment plus government spending. Plus the difference between imports and exports. Obviously we’re moving into a world now where consumer spending is going to be off sharply. Now if it’s more like a hurricane that could rebound relatively quickly. Business investment obviously is going to be down, but then ultimately may come back up, we’re seeing that gets back to that retooling. If pharmaceutical companies are forced to shorten supply lines, you may actually see business investment have a pretty substantial rebound in some areas overtime. Government spending obviously is going to be up, as unemployment numbers go up. They’re passing A 2 trillion-dollar stimulus bill today, I believe. And then on the net, important exports numbers, obviously fewer goods coming in from China, with whom US has a large deficit. Oil prices being down substantially, we should see improvement in the import export numbers, whichever time should enhance the GDP figures.

So obviously we have the world before and we have the world after so things that might have worked in this environment may not work here, but it’s not that there aren’t opportunities in the new world that we’re moving to.

From a market pricing standpoint again equity markets look very much like outbreak wartime. So again, you have to make a determination. Is that a passing sort of event or more permanent sort of change in the economy? We leaned towards the more permanent changes what we’ve seen through this is its accelerated. Some trends which were already in existence. For example, the shortage of Ventilators has somewhat been met by 3D printing. For example, in Italy they were short. They pulled in 3D printing machines. They took CAD drawings and very quickly we’re able to print up at least some marginal respirators. So, in the past that would have been prohibitively expensive activity. But now people aren’t as worried as much about the incremental expense and trying to get the cheapest machine because the cheapest machine be manufactured in bulk in China, but rather the availability of the machine through 3D printing. So, these are the types of stories that we’re seeing below the surface that we think are extremely positive.

In the bond market. Obviously we’re seeing a lot of stress there, and I’ll kind of touch on that. Moody’s BAA index finished the week with a yield of about 5.1, that’s a spread of a little over 400 basis points against the comparable 10-year treasury. That’s a level very similar to what we saw during the last financial crisis, and quite a bit higher than the prior three recessions, including ’73, ’74, ’82, and the early ‘90s recession. So again, very much recessionary pricing in the bond market as capital is growing more scarce, an again very uneven. So, leisure companies obviously, a lot more stress. Some of those actually went from investment grade to junk status, essentially in here. Where is more essential, services are doing fine.

So again hopefully it helps us put things in context a little bit. I know it’s a messy market. Very quickly moving market, but not unprecedented. Just very, very long time since markets have experienced something like this. And we have to keep looking at it as data comes in. Our personal outlook or my personal outlook is that we’re going to see really kind of combination. I do think we will see some bounce back, as consumers obviously get back out of quarantines, and the health scare kind of eases a little bit, but I do think it’s going to cause a rethink on supply lines and the way we think about business and what’s critical versus what’s nice to have versus a have to have.

So I do think it will influence personal spending decisions and corporate spending decisions for a very, long time. I do think as a result of that, we’re going to see a greater role of government in the marketplace. That’s very common during times of war and other sort of events. And I would expect that to be relatively extended, probably a three to four year sort of transition period. As you see more programs that probably emphasize local production. I mean that some of what we’ve seen in the stimulus bills, for example, you can get the loans, but only if you create jobs. and I would say in this regard it’s much more positive than what we saw coming out of financial crisis, in that companies largely took the money and just bought back their stock, right? They didn’t really create jobs they didn’t really create infrastructure under the ground to make a much more sustainable recovery. So to the extent that we see better programs, we actually think it will lead to a much healthier marketplace going forward. Always available for questions. Feel free to email us phone call us. Obviously, we’re still working, though remotely, and we’d be glad to talk to you. Thank you, bye.


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