Last week OPEC talks broke down when Russia refused to agree to proposed production cuts.  As we have been saying in our recent letters, the coronavirus slowdown has reduced demand for oil and caused the price to decline.  It just got worse.

Over the weekend, Saudi Arabia decided it was time to launch a price war by cutting prices and announcing plans to increase output. So we have a double whammy hitting the market for oil, reduced demand and increased supply.  The price of oil dropped precipitously today, with WTI (West Texas Intermediate) trading in the low 30’s.[1]

While low energy prices are generally a good thing for the economy, this may be too much of a good thing, a little too quickly.  Companies in the energy sector will likely suffer reductions in profits, but there is also the issue of debt.  A lot of smaller energy companies are issuers of high yield debt–they borrow from banks, and they are often funded by private equity.  Bank stocks are under pressure.

This morning, for the first time in a long time, the S&P 500 declined 7% shortly after the open, triggering a 15-minute trading halt.  As we write this letter, equities remain down over 6%.  Meanwhile, the 10-year Treasury yield dropped below 0.5% for the first time ever[2].

What comes next?

Of course, no one knows what will happen in the short run but historically, declines like this have generally turned out to be buying opportunities.  That being said, what is happening today reminds us that new things can happen without much warning – bad things or good things.  For example, the oil price war might end quickly after Saudi makes its point, and the coronavirus might run its course with less impact than feared.  China already appears to be coming out of it, and the virus seems less problematic in hot climates, suggesting that it may be seasonal like the flu.

Meanwhile, everyone is ignoring last Friday’s job numbers.  Yes, those are backward-looking statistics; things may change going forward if things go wrong, but nonetheless they were very strong numbers, evidence of a strong economy.  We continue to create lots of jobs, and wages are rising[3].  And we have an accommodative Fed, providing liquidity to the market.

We will be tax-loss harvesting and rebalancing where appropriate, and we will be writing you and calling you.  We hope you are prepared to weather this storm, especially remembering that last year was really good; a lot of the decline is just giving back some of the recent large gains as we travel down the bumpy road to reasonable long-term returns.

Best Regards,

Roger Hewins

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.

[1] “Oil Price Charts.” OilPrice.com, oilprice.com/oil-price-charts.

[2] Li, Y., 2020. Dow Plummets More Than 1,200 Points, S&P 500 Sinks 5% Amid Oil Price War. [online] CNBC. Available at: <https://www.cnbc.com/2020/03/08/dow-futures-drop-700-points-as-all-out-oil-price-war-adds-to-coronavirus-stress.html> [Accessed 9 March 2020].

[3] Beilfuss, L., 2020. The February Jobs Report Was Fantastic. Why It Doesn’T Matter For The Market.. [online] Barrons.com. Available at: <https://www.barrons.com/articles/the-february-jobs-report-was-fantastic-why-its-not-helping-the-stock-market-51583502252> [Accessed 9 March 2020].

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