Last week and over the weekend, Federal, State, and local governments increased dramatically their efforts to slow the spread of the COVID-19 virus.  The mandated “social distancing” and “shelter in place” measures have heightened the uncertainty for the near-term and potential long-term economic impact of the fight against the virus.  This swelling fear of the unknown resulted in the worst week for the markets since the 2008 financial crisis.  Given the magnitude of the market corrections to date, we wanted to try to provide some context for the economic and ultimately earnings outlook that is being priced in at current market levels. 

We approach this topic recognizing how difficult and tenuous evaluating the current situation is.  Also, while we were right to recognize this correction felt anything but average, and thus be measured in our desire to increase clients’ equity exposure, that incremental approach and the preservation of cash is of only limited solace given last week’s continued stock declines.

Our nation’s response to COVID-19 in the past forty-eight hours has escalated dramatically.  Schools have closed, large gatherings postponed, and many employees are working from home.  Importantly, government agencies, healthcare systems, and private companies are coming together to fight the spread of the virus.  No one knows how prevalent the virus will be as it runs its course.  It could still be very bad.  Yet the more aggressive steps of the last forty-eight hours ensure the outcome is better than it would have been.

Woodmont Investment Counsel: Intra-Quarter Brief

March 4, 2020

A Tragic Night for Middle Tennessee

Thank you to all of our out of town clients and friends who have expressed concern and sympathy for the deadly tornado that ripped through Middle Tennessee March 3^rd. While our team was grateful not to suffer directly, many in the area are hurting. Our thoughts and prayers are with those who lost loved ones or have been otherwise impacted by the storm. Similar to after the historic flood of 2010, Nashville and the surrounding communities are already coming together to support those in need. Case in point, a local non-profit’s website crashed three times on March 3^rd due to the thousands of people trying to volunteer to help. With 2010 as an example, we are confident our community will emerge from this tragedy as a more cohesive and optimistic metropolis.  

According to the United States’ master clock keeper, the U.S. Naval Observatory, 2019 was not the last year of the decade.  Another reputable calendar resource, The Farmers Almanac, takes the same position.  For these official sources, decades are completed with years ending with “0” and begin with years ending with the number “1.”  For most everyone else, 2019 was it. Happy New Decade!  

Regardless of the calendar semantics, the year was an emphatic end to a rewarding ten-year period for stock and bond investors.  Up 31.5%, the S&P 500 had its best year since 2013. The index’s ten-year annualized return was 13.6%, which is well above the average price return of 8.3% since the inception of the 500 stock index in 1957 or 10.2% when the index originally began in 1926 with ninety stocks.  The MSCI All-World Index, which is comprised of approximately half U.S. and half non-U.S. stocks, returned 26.6% this year.  Hindered by non-U.S. stocks, which have now lagged in 8 of the last 10 years, the All-World index’s ten-year annualized return is 9.4%. 

Nashville “Unicorns” (a.k.a. the locals) speak of a time when the city experienced all four seasons, including more than a mere dusting of snow in winter.  With temperatures in the 90s throughout September, and no measurable rain for over thirty days, a return of this four-season ritual any time soon seems improbable. 

Of course, consternation for the Nashville weather is short-lived when reminded of the destruction of Hurricane Dorian, which made landfall in the Bahamas on September 1st.  The Category 5 storm left many dead and missing.  It will take years to rebuild and the topography has been changed for generations.  While of limited solace to Dorian’s victims, the quick and generous response to this tragedy is a reminder that people are charitable, even amidst today’s rapidly changing economic and social landscape.   

What season lies ahead for investors is unclear.  It should be eventful considering the recognized near-term obstacles, let alone, the long-term.  Thus far in 2019 markets have proven resilient.  The S&P 500 and MSCI All-World indices are up 20.6% and 16.2%, respectively.  As a result, stock investors have recouped the fourth quarter losses of 2018 and then some.  Thanks in part to the third quarter rally, bonds are up too with the Barclays Aggregate Bond index gaining 6.4% year-to-date. 

That’s right.  Bonds and stocks are both posting big gains this year.  It’s like a deep snow in Nashville.  It can happen, but it’s unusual.