Thoughts on the Market

March 16, 2020

Today the CBOE Volatility Index (VIX), which tracks the implied volatility of options on the S&P 500 Index, closed at 82.69. This is a new all-time closing high eclipsing the prior mark set 11/20/2008 during the height of the financial crisis. Needless to say, fear, uncertainty and panic are driving the market right now. As far as what has driven the panic, nothing really has changed since our last blog post one week ago – it is clearly still COVID-19 related headlines, which can still be separated between China (improving official virus trends) and rest of world (virus cases expanding). This continues to be amplified, especially for debt markets, by the ongoing oil price war between Saudi Arabia and Russia. Global economic data will almost certainly show a global recession (as defined by two consecutive quarters of negative GDP growth) for Q1 and Q2 2020. What is still very uncertain is just how deep the recession will be, how long it will last, and how quickly the world economy will rebound once the virus is contained.

We believe that the global economy and the stock market will recover from this crisis for those who stick it out at their target risk level. We see three main reasons for long-term optimism:

  1. Long-term economic growth is typically broken down into three components: labor, capital and technological change (productivity). Once the virus is eventually contained, whether through herd immunity, medical breakthrough, or some other means, we do not see any significant long-term impact to any of these three components.
  2. Fiscal and monetary stimulus are ramping up, the most significant being the Federal Reserve cutting interest rates to zero and reinitiating its financial crisis-era QE bond-buying program yesterday. While we acknowledge that these measures cannot put people back to work in this instance, they will definitely help companies weather the storm
  3. The US has woken up to the severity of the situation. Other countries like Taiwan and South Korea have shown us the path to minimizing deaths: social distancing, rampant testing, extreme hygiene. These steps can help prevent a dramatic increase that can overwhelm the hospitals and lead to significant fatality rates as they have in Italy. These steps are now being taken in the US, and along with US hospitals currently undergoing extreme preparations, we are optimistic that the US situation will stay under control.

GGS Updates: 

The GGS Investment Team made two updates to our stock selection and portfolio management inputs last week.

  1. Updated beta estimates: In last year’s internal scenario analysis testing of our client portfolios and individual security beta estimates,1 we incorporated the Q4 2018 downturn as a new scenario. Last week, we decided to fast track adding a new scenario called 2/11/20-3/11/20 to our beta estimates. In a systematic manner, we looked at the worst offenders for underpricing beta risk over the past month, and we added risk to the GGS beta estimate depending on the degree of underperformance. These changes will be in effect until we complete our 2020 scenario analysis project. Nothing changes regarding what we have previously written. We are trying to be neutral to market expectations of how this crisis will play out. We believe this change should help us towards that goal going forward.
  2. Stock selection methodology change: We believe the recent sell off has given rise to opportunity to buy very high quality companies at a much more reasonable valuation than a few weeks ago. We also know from our recent internal stock selection methodology analysis that the long-term sustainable competitive advantage piece of our methodology has performed very well.2 We expect this to continue long-term. Therefore, last week we made a permanent change to double the weight on competitive advantages in our overall stock selection score.3

We are working diligently every day to help our clients stay the course through these challenging times. GGS employees are all equipped with secure remote work connections and our ability to serve you has been unaffected by this crisis.

1 See slide 8 for more details on our annual scenario analysis project

2 See for more details on sustainable competitive advantages

3 See for more details on our 3-step equity selection methodology

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