As we briefly highlighted a few weeks ago, as the
equity markets began to sell-off, we continue to monitor the economic turmoil
and remain confident that global markets will recover from the economic
uncertainty that we are facing with COVID-19 (Coronavirus). As we have told
clients in the past, volatility and economic/political uncertainty is very
normal in financial markets and it’s important to not overreact and panic. It
is very normal for investors to feel like this time is different as we go
through a correction. While the circumstances driving each are always
different, one thing we know is that we eventually emerge, and over time, the
markets continue to move higher.
Of course, we are closely following all the headlines
and like everyone else don’t know how long this will persist; but what we do
know is that the underlying US economy appears strong and the financial system
is well-capitalized. We are still in the early stages of truly understanding
the full economic, financial and social impact to our economy and globally.
There is no doubt at this point that global GDP will slow, but we remind
clients that the market is forward looking and already pricing this in to some
extent. That said, the possibility of more downside is very real, and the bottoming
process may take a while.
We are closely monitoring client portfolios and will
adjust as new information becomes available, but we are not in the business of
timing markets and calling tops/bottoms. Each of our clients are allocated
based upon the plan that we set in place for them and we do not believe it’s a
time to deviate from that by either dialing up risk or by bringing it down
significantly. With the range of outcomes being so vast, we feel it best to
stay the course. It’s not time to sell but it’s also not a time to ditch your
bonds and cash for stocks.
We are hard at work trying to identify how we can use
this downturn to our advantage: tax loss harvesting, buying great companies at
steep discounts, & shedding exposure to areas of the economy that we view
as being unstable, such as Energy. You have heard us harp on the importance of
diversification and periods like we are currently experiencing are a reminder
of why it is vitally important. Our bonds and other diversifying strategies
have performed quite well over the last few weeks.
As always, we are here to answer any questions and be
a resource. Please feel free to reach out at any time.
Canal Capital Management
Canal Capital is Pleased to announce that it was named to the RIA Future 50 list published by CityWire USA. The RIA Future 50 firms represent a group of finance professionals who are collectively creating this new investment landscape. They have their own unique story to tell, are driven to succeed on their own terms and, most importantly, are in charge of their own investment decisions.
Click here to see the full list
On August 14th, the 10 year Treasury Yield went slightly below the yield for the 2 year Treasury, the first time this has happened since 2007. Economist pay close attention to the 10 year vs. 2 year Treasury yields, as its historically been a strong predictor that a downturn is on the way. The yield curve has inverted before every US recession since 1955, although it sometimes happens months or years before the recession starts. The average time between the last 5 yield curve inversions and a recession was 17 months. This lead time is the key and its still very uncertain how long a lead time we may have in the current economy before there is an actual recession. That said, an inverted yield curve, like most other indicators, is not perfect and doesn’t mean a recession is imminent.
Please Click Here to Read our Full Commentary
As we write this letter and reflect back on the past few weeks, the word that keeps coming to mind is REDEMPTION. Just like the Virginia Cavaliers basketball team in the National Championship and Tiger Woods at The Masters, the market has had the ultimate bounce back story: falling 20% the last few months of 2018 to up over 16% for the year as of the writing of this letter. Despite this bounce back, the risks initially associated with the steep decline in 2018 are still very much there, and until we have a clear signal telling us otherwise, we will remain with a more defensive posture. After all, it was the defense by Virginia and the safe play of Tiger Woods that won them championships.
Please Click Here to Read our Full Commentary
What a difference a year makes! The largest drop in 2017 was less than 3%, while 2018 experienced the largest drop since 2009 at nearly 20%. In 2017, December saw near record highs while December of 2018 was the worst on record (except 1931, The Great Depression); Christmas Eve was the worst in history. Stocks were not the only problem investment: nearly every major asset class was negative for the year with the exception of the aggregate bond index which was up 0.01%. The chart below shows that among the eight largest asset classes, none gained more than 5% for the first time since 1972 (see chart below). 2018 was a major anomaly and will go down in history as a tough year for investors.
Click here to read our full 2019 Market Outlook