April 23, 2020

COVID-19 Volatility Increases

March 13, 2020

The S&P 500 declined nearly 10% yesterday marking the worst one-day performance since 1987. The speed and breadth of the equity market decline has been breathtaking.  

As of yesterday, the S&P 500 has now declined 26.7% since the February 19th high.  We have seen overnight futures markets drop by limit down (-5%) and domestic stocks hit circuit breakers early in trading at -7% declines on more than one occasion.  In addition to March 3rd’s emergency rate cut, the Fed announced $1.5T in additional liquidity over three days.  These additional measures did little to appease nervous equity market investors.  In contrast with 2008, at this time, we do not believe the issue is excess leverage or financial solvency for the banking sector.   

Additionally, colleges have begun closing campuses and moving classes online.  Many of the major sports leagues (e.g., NBA, NHL, MLB, MLS, etc.) have temporarily suspended play and the National Guard has been called into New Rochelle (a town in Westchester, NY).

Add an Oil War?

Over the weekend an oil war from the OPEC + (Russia) erupted.  Russia refused to go along with proposed additional oil cuts requested by Saudi Arabia.  Saudi Arabia retaliated by not only increasing production but cutting the cost of their oil to Europe and Asia.  Spot crude oil closed Monday at $31.13 dropping -25% percent.  This sent energy stocks collapsing and compounded what was an already difficult market environment.

Additionally, as energy is a ~9.3% weighting in high yield indexes we saw spillover into, not only non-energy high yield, but investment grade corporates throughout the week.  High yield spreads have widened to +7.24%.

The View from Our Investment Managers

We have been in regular contact with our investment managers through this volatile period. The general view is that until a vaccine or more clarity around a broad policy response becomes available, markets will remain extremely volatile and struggle to find footing.  While credit opportunities are beginning to emerge in high yield and distressed, do not believe we are there yet, but expect substantial opportunities will present themselves in the coming weeks for long-term investors.  

What Comes Next

We echo a highly respected fixed income manager of ours who noted that a vaccine and resolution to the OPEC question could move sentiment quickly in a positive direction.  We do not have any insights into the timing of such resolutions.

Interest rates cuts will not solve this problem.  We believe coordinated G7 fiscal and monetary stimulus will be required to stem the tide.  We have seen periods where markets have suffered steep declines (e.g., 2008, 2000 and 1987) and in our experience, it is important to maintain a long-term perspective.  We are confident this too will pass and staying the course will be rewarded.

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.