February 26, 2020
Given the rapid equity market sell-off early this week centered around the COVID-19 (“Coronavirus”), we thought it would be an opportune time to update you with our latest thinking.
What is the Coronavirus?
The Coronavirus, first detected in Wuhan City, China, is respiratory in nature and manifests itself in fevers and pneumonia-like symptoms. The United States Center for Disease Control (“CDC”) found the sequences from U.S. patients, who tested positively for coronavirus, suggest a likely single emergence of the virus from an animal (widely thought to be a bat).
The CDC puts the potential risk to global public health at “high”, but for the general American public, the immediate health risk is “low”. If the Coronavirus became widespread within the United States, the medical system would experience large numbers of admittances at the same time, which would strain the healthcare infrastructure.
According to the World Health Organization, as of February 21st, 2020, over 76,000 cases and 2,247 deaths have been confirmed globally. The disease is more likely to be lethal in older patients who already have pre-existing conditions. Cases have been noted in numerous countries, including the U.S., South Korea, Iran, and Italy.
Many are drawing a comparison of the Coronavirus to the SARS epidemic of 2003; however, the Coronavirus appears to be much more widespread with a significantly lower death rate.
Market Returns & Volatility – Isn’t the U.S. Immune?
There is still much we do not know about the virus, including how long after infection do symptoms actually appear, are enough people being tested, should we believe published numbers, and will it actually subside once spring and summer arrive in the Northern Hemisphere?
These unknowns are driving concern about the vulnerability of global supply chains. As we discussed in our August 2019 note, the majority of the recent market volatility coincides with both increased trade tensions with China and large movements in global rates. The two in tandem have greatly exaggerated the individual effects on the markets. While obvious areas subject to a potential sell-off were Chinese equities, airlines, and cruise ships, U.S. equities (growth in particular) were not immune due to investor positioning and exposure to global supply chains.
In 2019, the S&P 500 gained 31.5% despite minimal earnings growth. Per FactSet, “S&P 500 companies are reporting growth in earnings of 0.6% and growth in revenues of 4.2%.” In other words, multiple expansion drove equity performance, as opposed to broad earnings growth. In fact, the Fed cut rates three times in 2019, halted its balance sheet tapering, and started growing the balance sheet again due to repo rates spiking to 10% in September. The rally in U.S. equities accelerated with liquidity injections in the repo market and resumption of the Fed’s balance sheet expansion. Investors clamored for US equities, especially growth stocks.
By various measures, including the S&P 50-Day Moving Average Spread, U.S. equities had been overbought since October, making them vulnerable to the sell-off which has now occurred.
On February 25th, 10-year U.S. yield fell to as low as 1.31%, a new record. This is most likely due to large amounts of foreign buyers looking for safe heavens. Additionally, within the context of negative European and sub 2% Asian rates, this has driven up the dollar, as U.S. rates have looked relatively attractive.
As we noted in August, while the U.S. economy remains more stable than much of the rest of the world – global economic data is worrying. Indeed, recent economic data supports our view with German and Japan GDP growth showing 0.5% and -0.4% year on year growth, respectively. Japan’s fourth-quarter GDP actually contracted at a -6.3% annualized rate versus Q3 – and this is prior to the Coronavirus. We should expect global GDP figures to deteriorate with the disruption in economic activity we have already witnessed.
As we wrote about in our August letter, we believe that we are in a classic late-cycle market and remain cautious about putting fresh money to work in U.S. equities. We also are cautious on developed international equities but believe an adept active manager can find pockets of opportunity. We continue to avoid long-only managers in emerging markets, but still believe there are some opportunities for our trading oriented hedge fund managers. We continue prudently to reduce our managers that have performed remarkably well over the past year and are using the proceeds to rotate into alternative investments and fund capital calls for private equity.
In fixed income, we have been (before the equity market sell-off) opportunistically extending duration and adding to investment grade mandates. While yields are low within investment grade, we believe in the context of negative global interest rates, that investment grade U.S. bonds remain attractive in case of continued global growth deceleration.
The two areas we remain positive on in this environment are alternative investments and private equity:
- In alternative investments, hedge fund managers in our Geller Select Alternatives LLC fund perform well during these periods of volatility. In addition, through our event-driven strategy allocations, we have positioned ourselves well should there be an increase in distressed situations. Our commodity trading and macro strategies also have the capability to profit from market moves during difficult market periods.
- In private equity, we favor smaller, targeted venture capital and co-investment opportunities, from a select group of investment managers. We recently opened Geller Special Opportunities Fund II, LLC, to allow us to provide investors access to these opportunities. We believe this is an opportune time to reallocate a portion of traditional equity exposure into long-term special opportunities.
As always, we will continue to monitor financial markets for our investors cautiously and believe maintaining a long-term view with a diversified portfolio is very important. Although volatility may increase and be unsettling in the short run, we believe it provides opportunities for future sources of return.
The views expressed in this letter reflect those of Geller Advisors LLC as of the date of this letter. Any views are subject to change at any time based on market or other conditions, and Geller Advisors disclaims any responsibility to update such views. Any performance information contained herein is unaudited and estimated. Past performance is not necessarily indicative of future results and investors should not base investment decisions simply on past performance. The information presented in this letter is for informational purposes only. Different investments involve varying degrees of risk and the specific investments or investment strategies mentioned in this letter may not be suitable for your portfolio. This letter is not to be construed as investment advice and does not constitute an offer to sell or the solicitation of an offer to provide investment advisory services or purchase an interest in a fund. Any such offer or solicitation will be made to qualified investors only under a formal engagement letter and Investment Policy Statement or by means of an offering memorandum and related subscription agreement as applicable.