When Mr. Market is depressed, our Portfolio Manager Nathaniel Leach always likes to say: “The British had it right during WWII: we just need to ‘keep calm and carry on.’” We appreciate his sentiment and couldn’t agree more, but we wanted to give a brief update on some recent news.

In the last two weeks, we have seen a market sell-off. Fears of a Coronavirus (COVID-19) pandemic has placed the financial markets on edge. As many of you may know, the Coronavirus started in mainland China and has since spread across the globe. The industrial, travel, and tech industries have taken a beating as worries mount about global slow down. With China being the epicenter of the disease and being a primary supplier of goods across the globe, forecasters are worried about supply chain disruption and lower consumption with people not traveling and staying home from work (i.e., both a supply and demand problem). These concerns are now rippling across the globe, and the thought of a global economic slowdown is on the tip of everyone’s tongue.

Furthermore, the Federal Reserve declared an emergency rate cut, bringing the Federal Fund Rate down -0.50%. With the continued market sell-off, the 10-year treasury yield has hit all-time lows. To add to the pain, on Sunday night Saudi Arabia and Russia could not foster an oil production deal. Saudi Arabia’s response was to cut prices and increase production, sending oil prices crashing. Also, the markets are worried bonds backing the oil industry may be in jeopardy as over-leveraged energy companies could feel the pain from a significant drop in oil prices.

Mix all of this together, and you create fear. Fear leads to irrational behavior and market selling. Is the decline in prices warranted? To be frank, we do not know, nor does anyone else. And don’t just take it from us, in Howard Marks

Will stocks decline in the coming days, weeks and months? This is the wrong question to ask… primarily because it is entirely unanswerable. Since we don’t have the answers to the questions about the virus listed on page two, there’s no way to decide intelligently what the markets will do. We know the market declined 13% in seven trading days. There can be absolutely no basis on which to conclude that they’ll lose another 13% in the weeks ahead – or that they’ll rise by a like amount – since the answer will be determined largely by changed in investor psychology. (I say “largely” because it will also be influenced by developments regarding the virus… but likewise we have no basis on which to judge how actual developments will compare against the expectations investors already have factored into asset prices.)”

Simply, with all of the news swirling and new recession fears on the table, our mindset has not changed. We will consider such factors when conducting our due diligence on the positions we have decided to purchase, but we will not allow them to dictate our investment decisions.

We will continue to observe such events and monitor the fundamentals of the companies we own. We intend to take advantage of the upcoming volatility. We will wrap up this series with a quote from Warren Buffett: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”



P.S. – if you are interested, below are a few articles to read:

Howard Marks Memo: Nobody Knows II

Recession Recon

[1] https://en.wikipedia.org/wiki/Howard_Marks_(investor)

[2] https://www.oaktreecapital.com/docs/default-source/memos/nobody-knows-ii.pdf