Yogi Berra’s famous saying seems particularly apt in these early months of 2020 as big surprises around the world have caught policymakers and investors off guard.
Every December, as I read through economic and market forecasts, I think about how long it will be until most of the predictions become pretty worthless as inevitably “unforeseen events” occur. Can I throw all those predictions away in a few months? Maybe even a few weeks?
This year set a record low for the durability of annual predictions as the surprise attack on Iranian General Soleimani on January 3 shook markets with the uncertainty of what the Iranian retaliation would look like and a potential response by the United States. For now, the “hot” conflict has been contained to the January 8 Iranian missile attack on the US base in western Iraq.¹
The Coronavirus, Pretty Disturbing?
Markets recovered only to be met with the news of a new flu-like virus spreading rapidly in the Chinese city of Wuhan and its province of Hubei. The spread of the coronavirus (Now officially named COVID-19 by the WHO) has caused unprecedented quarantine efforts to be implemented across China. The loss of life and the suffering of the people who have become seriously ill is tragic. The economic fallout is substantial as factories have shut down and travel to and from China has been disrupted.² According to former FDA Commissioner Scott Gottlieb, the mortality rate will likely settle in the 0.2-0.5% range versus the flu mortality rate of 0.1%. Severe pneumonia results in 5-10% of cases. The biggest concern is the rate of the spread of the disease, which is expected to settle in the 2-3 new cases range for every case reported vs.1.3 for the seasonal flu, according to Gottlieb. Things are very fluid on the treatment and vaccine front, but certain antiviral medications may already be effective. A vaccine could be in testing within 2-3 months and ready for distribution in time for the next flu season. We can hope that the spread subsides as we enter the warmer months as has happened with other coronaviruses, but it is just not known that will happen in this case.³ Markets at Record Highs, Really? But as of February 10, the S&P 500 and the
Nasdaq hit record highs⁴. What gives?
While no one can consistently predict events, it is also very challenging to predict how markets will react to those events. If a month ago we could have gotten a sneak-peak into today’s headlines about the economic impact of the quarantine in China, a bet on lower markets would have seemed like a sure thing. Instead markets seem to be looking through the impact of coronavirus to an eventual recovery of economic and business activity in China, most likely aided by substantial government stimulus. Meanwhile, recent reports on employment, manufacturing activity and most corporate earnings have exceeded expectations. Interest rates remain historically low, and the Federal Reserve has signaled that it is intending to keep short term rates where they are for an extended period of time.⁵
From our perspective, therefore, in spite of all the moving parts out in the world in 2020, this year is really no different than any other. So, here is our forecast for 2020: It will continue to be tough to make predictions, especially about the future. Our investment program will seek to remain strategic, disciplined, diversified, and cost-and tax-efficient, knowing that a 5-10% correction can happen at any time, whether over concerns about the spread of coronavirus or any other “unforeseen event.”
Chief Investment Officer
¹Goldman, R. and Rubin, A. (2020).8 Americans Were Hurt in Iranian Strike, Military Says, Despite Trump Statements. [online] Nytimes.com. Available at: https://www.nytimes.com/2020/01/17/world/middleeast/iran-missile-attack.html [Accessed 10 Feb. 2020].
²CNN. (2020).February 11 Coronavirus News -CNN. [online] Available at: https://www.cnn.com/asia/live-news/coronavirus-outbreak-02-11-20-intl-hnk/index.html [Accessed 11 Feb. 2020].
³Scott, G. (2020).Former FDA Chief Scott Gottlieb answers viewer questions on coronavirus. [online] CNBC. Available at: https://www.cnbc.com/video/2020/02/10/scott-gottlieb-coronavirus-outbreak-questions-squawk-box.html?&qsearchterm=gottlieb [Accessed 11 Feb. 2020].
⁴Imbert, F. (2020).Dow jumps 170 points, Amazon leads S&P 500 and Nasdaq to record highs. [online] CNBC. Available at: https://www.cnbc.com/2020/02/10/us-futures-point-to-cautious-open-as-investors-monitor-coronavirus.html [Accessed 10 Feb. 2020].
⁵Rosbb, G. (2020).Two Fed officials back keeping interest rates steady. [online] MarketWatch. Available at: https://www.marketwatch.com/story/fed-should-hold-steady-for-a-while-harker-says-2020-02-10 [Accessed 11 Feb. 2020].
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. For detailed information about our services and fees, please read our Form ADV Part 2A, which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (650) 620-3040.