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Thoughts on Recent Market Volatility
Escalating COVID-19 concerns and Saudi Arabia’s decision to cut oil prices and boost production have prompted a sharp selloff in global equity markets over the past month. We are monitoring both situations closely and believe the biggest relative performance risk from here is massive volatility. While there will likely be large up days for battered sectors, we expect a drift lower on balance until the true extent of the COVID-19 impact can be discounted into stock prices.
We believe the COVID-19 illness will be disruptive to supply chains and demand across the global economy in the short term—pressuring corporate profits for at least the first and second quarters of 2020. If the virus returns during the fall flu season, there could also be after-effects beyond the first half. While the impact’s magnitude is impossible to predict, we believe any spending decisions that can be delayed will be delayed and there will be job loss, particularly in the airline, hotel and rental-car sectors—areas of the economy that are cyclical in nature and tend to be driven by more systematic factors. Furthermore, any companies with a field sales force will struggle in the short-term since people are staying off airplanes. That said, we believe that as in past public health emergencies (such as SARS in 2003 and H1N1 in 2009), this disruption will prove temporary.
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