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KAR Perspective: Update on Market Volatility

Kayne Anderson Rudnick puts recent stock market volatility in perspective, cautioning investors to ‘sit tight.’

The S&P 500® Index suffered its greatest percentage decline since the global financial crisis in 2008, falling more than 7% on March 7. The fall in the stock market came amid continuing fears about the coronavirus (COVID-19) and a Saudi-Russian price war that sent crude oil prices crashing over the preceding weekend.

Stocks Behaving Like Recession is on the Horizon

A number of factors suggest a recession may be looming:

  • Large-capitalization stocks are down approximately 18% from their peak, which is close to bear market territory.
  • Small-capitalization stocks are down approximately 29% from their peak, which is in bear market territory.
  • Debt-laden companies have experienced a sharp drop in performance since the middle of February.

JPMorgan Index of High Interest Expense Stocks

Six months ended March 11, 2020

JPM Index High Interest Expense Stock 600

Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results.

  • High yield credit spreads, especially in energy, have widened significantly.

High Yield Sector Spreads

As of March 11, 2020

High Yield Sector Spreads 600

Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results.

  • Weaker industries leading into the downturn—such as energy, retail, and banks—have continued their downward trend.

All of these factors suggest the market is pricing in a much higher probability of a recession.

Is Recession Possible?

The short answer is yes. Much of a recession scenario is being driven by fears of COVID-19 spreading around the globe. Virus fears are causing a lull in demand across a variety of industries. Face-to-face travel is being curtailed, conferences and events are being cancelled, businesses are putting hiring and spending on hold, and M&A activity has slowed. It is likely the spread of COVID-19 may get worse in the U.S. with a peak sometime in the summer.

We had already anticipated slower GDP growth in 2020, and the coronavirus is slowing this further. The good news is that there has never been a recession without layoffs picking up, and this has not happened. This will be important to watch as the consumer makes up the majority of GDP.

What Are Companies Doing?

Most companies are actually seeing improvement from Chinese supply chain sources over the last month as China has gotten their coronavirus situation under control. Many Chinese companies are almost back to where they were before the virus outbreak (in terms of the supply chain). However, the worry now is about a demand shock due to an increasing number of cases in Europe and the U.S. in particular. Travel and meetings are being curtailed and many employees are working from home. It is obviously an unpredictable and fluid situation so companies are taking it day by day. Many have reduced or withdrawn earnings guidance due to the virus impact on supply and demand.

What Should Clients Do?

We advise clients to sit tight as stocks have been oversold and are getting cheap. As of March 6, 78% of S&P 500® companies had dividend yields greater than the 10-year U.S. Treasury yield.

78% of S&P 500 Companies have Dividend Yields Greater than the 10-Year U.S. Treasury Yield

As of March 6, 2020

 Of SP 500 Stocks With Dividend Yields Greater 600

Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results.

Difficult to Call: The Market is Still Expensive

S&P 500 Index P/E (next 12 months)
As of March 6, 2020

SP 500 NTM PE 600

Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results.

Fed and fiscal policy will attempt to help, especially during this election year. Recession is not a foregone conclusion, but we expect the first and second quarters will be negatively impacted. If no meaningful recession materializes, stocks should start to recover over the next 12 to 18 months.

The Fourth Reset Since the 2009 Low

S&P 500 Index (50- and 200-day Moving Average)

% of Stocks Down 20% from High

Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results.

We recognize that we are navigating volatile and uncertain times. We thank our clients for their continued confidence and we will continue to diligently monitor the situation. We are confident that we own structurally attractive businesses and that they should continue to prosper once normal business activity resumes.

Past performance is no guarantee of future results.

The S&P 500® Index is a market capitalization weighted index which includes 500 of the largest companies in leading industries of the U.S. economy.

The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.

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