FuelMarch 11, 2020 -
Categorized in: IAG News
Fueled by continued upbeat earnings forecasts, the S&P 500 set its most recent record high a mere three weeks ago on February 19.
Coincidentally, on February 19 our weekly blog was inspired by the fiery finish of the Daytona 500, and that blog’s very last sentence concluded with “It is better to understand your risks before the next crash instead of after.”
We are now after the start of the crash, and we do not see the finish line yet.
Fueled by the vicious uncertainty of a global coronavirus outbreak, future earnings forecasts are nothing but guesses at this point and short-term traders have taken that as a signal to sell.
Adding fuel to the fire, Russia and Saudi Arabia have agreed to disagree on limiting oil production. Saudi Arabia then announced plans to increase oil production, causing the price of oil and the estimated future earnings of the entire energy sector to collapse.
Some analysts surmise this may be an attempt to drive American oil producers out of business. Perhaps Russia and/or Saudi Arabia are willing to go through some short-term pain to have less competition in the future. Or perhaps there was just a misunderstanding.
However, adding an energy earnings collapse on top of global coronavirus uncertainty led to panic in the financial markets on Monday.
Where do we go from here? We don’t think this blog will mark the end of the downturn and that volatility will remain until earnings clarity is regained.
Earnings clarity cannot be regained until governments’ and consumers’ reaction to coronavirus fears subside. Fear of the virus will continue to disrupt “normal” consumer behavior patterns which in turn will continue to disrupt companies’ business plans and profitability. We cannot predict when this will end.
Our disciplined investment process is designed with the humble knowledge that market downturns fueled by uncertainty can ignite at any time for any reason. For that reason we build in an 8-year timeframe for stock investments in our client portfolio. This reduces the odds that expected downturns such as this will impact our client’s long-term portfolio cash flow.
Now is the time to stick with our investment process. Do not abandon long-term investments because short-term traders are pessimistic at this moment.
Quote of the week: Thomas Fuller: “Contentment consists not in adding more fuel, but in taking away some fire
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