Investor Insights

February 2020 Investor Report

Published: March 31, 2020Updated: April 30, 2020

By: Stash Graham

The second month of the new decade certainly gave us a bit to talk about. The Coronavirus continues to create trouble for countries and businesses around the world. As the virus spreads, governments are trying to decide the optimal policy to protect citizens while allowing for economies to properly function. Apple, the multinational technology behemoth, just reported forward guidance which called for both a reduction in supply and demand in the forthcoming year. The S&P 500 had started strong but the last 6 trading days produced historically bad performance, the worst since the Great Financial Crisis. Over these 6 days, the S&P 500 fell -12% and ended February lower by -9.8%. Overall for year-to-date (since January 1) the S&P 500 is down -8.5%. The blue-chip Dow Jones Industrial Average was down -11.54% on the month. Interest rates on the long end of the safe-haven United States Treasury (UST) curve continued to move lower. The 30-year UST hit historic lows in yield and provided a stabilizing effect for our widely held bond positions like SLQD (short term investment grade bond ETF) which was up +0.3% on the month. Gold showed relative strength as it finished the month flat and it is up +4% year-to-date. The precious metal’s outperformance this year continues but bares monitoring as we did see some selling pressure towards the end of the month.

Over time this virus will certainly pass. The economic repercussions, however, have yet to be fully understood. We have highlighted the spread of the virus in our 2 client emails last week. If you are not getting our emails, please reach out to us and we will update the email address list to include you. We respect everyone’s privacy, but speedy communication is extremely important to us as a firm, especially at times like this. Mid-month we witnessed the quick expansion of the virus into the European continent especially Italy.

 Moody’s Analytics has warned of the virus’ impact on Italy’s economy: “The outbreak of the virus in the northern regions of Italy – which account for approximately 41% of the country’s GDP – adds further downside to the Italian economy’s already weak growth outlook and increases the risk of Italy sliding into recession. Although the scale and duration of the impact are highly uncertain at this stage, temporary disruption to consumption and production is highly likely.” Approximately, 30% of all S&P 500 revenue comes from Europe and Asia (120 S&P 500 constituents get 50% or more of their revenue from abroad). The Wall Street Journal had a couple of good articles last week that I would recommend looking up online, “Europe Girds Against Italian Outbreak” and “German Economy Looks to Ward Off More Contagion”. The articles detail the structural changes being made to prevent the spread of the virus and how those changes (i.e. reducing corporate travel via air) can suppress economic growth.

Now that the virus has come ashore, the February 25th CDC press conference detailed how there was an expectation of community spreading here in the US. Dr. Nancy Messonnier, Director of CDC’s National Center for Immunization and Respiratory Diseases confided to the reporters that she is telling her family to expect severe disruptions to their lifestyle. The stock market did not like the implication and went into a selling frenzy. The economy is more reliant on the consumer now than at any other point in recent history. Business fixed investment is non-existent and not coming anytime soon. Government spending has grown materially but it does have limits over how much it can grow in a short-term time frame. Corporate top line revenue (sales) is a direct result of consumer spending. Business can control profit margin but not the top line. A decline in revenues will put significant pressure on businesses at a time they have been concerned with maintaining expenses. Compression of these 2 factors from both sides, revenues, and expenses, generally leads to a revaluation of risk regardless of the short-lived nature of the force exerting the pressure.

We continue to hear of business executives and parents who are changing or considering changing, their travel plans because they do not want to risk their colleagues or family members getting sick and then infecting others. What will this do to the revenue of businesses and to business productivity levels? This is what the market has reacted to. Throw in a record layer of outstanding debt held in the corporate sector and now the focus turns to how much has systematic risk increased. We will continue to monitor events and act accordingly with a focus on limiting downside risk.

Please review the following updates from some existing positions that we manage:

BlackRock Credit Allocation Income Trust IV (Ticker: BTZ)- In early February, the trust announced that they bought back approximately 25% of shares offered for tender pro-rata. As a result, our position in the monthly payor shrank by 25% and we have continued holding the smaller position. We will monitor the credit risk but are encouraged that BlackRock will take initiatives to help shareholders realize net asset value. Shareholder friendly management teams tend to outperform in the long run.

iShares MSCI Global Gold Miners ETF (Ticker: RING)- We halved our position in the gold miners ETF after meaningful volatility in the sell-off week. We have not sold our physical gold position (Ticker: IAU). The thought that interest rates will continue their march lower continues and gold should benefit. The Federal Reserve meeting in March should produce an interest rate cut. This would be the 4th 25 basis point cut in the last 12 months. We would expect another cut after this if the 10-year US Treasury maintains its place in the 1.10-1.20% range. The debt market has been telling the equity markets that they have been too bullish for too long. Should family members or friends become overwhelmed and concerned with recent market events affecting their financial position please do not hesitate to provide them with our contact information. We will be more than happy to assist them in forming a sound financial plan that meets their goals and objectives for the future.  Please remember we are here to be of service.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.