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As the coronavirus outbreak sweeps across the globe, we expect economic activity over the coming months to weaken. While I’m not an epidemiologist, many signs point to the virus spreading further before it is contained. It’s too early to tell how much of an economic impact the virus will have, but it is potentially the negative shock that we have been planning for. To add insult to injury, the development on Sunday (3/8/2020) that the oil market is now in a full-blown price war could be a second negative shock to the system.

The first COVID-19 coronavirus case was identified in late December 2019 in Wuhan, China. Over the past two months the virus has wreaked havoc on China. While 89%[1] of all identified cases are within China’s borders, cases have been identified in 72[2] countries. Do you know which major country had the best equity market performance over the prior month? Hint: It may surprise you.

On March 3rd the U.S. Federal Reserve issued an emergency inter-meeting half-point rate cut. As I wrote in my March commentary, the market was increasingly pricing in a Fed Funds rate cut. The question was not if, but when and more importantly, how much. The Fed wasted no time trying to catch up to market forces. Long-term interest rates, which are controlled by the markets and not the Fed, were moving lower and the Fed was forced to respond. Unfortunately, this is not exactly how I would have liked it to play out, as I believe it diminished some of the benefit of the rate cut. Being reactive is usually not as good as being proactive.

EV9 7899 2000 Bull Above Bear

After brushing off most of the initial coronavirus news, global equity markets finally reacted in force during the last week of February. While many of the early moves China made to contain the virus bought other countries time, it is becoming evident that most, if not all, countries around the world will have to deal with the coronavirus on their soil. To what extent, we don’t know, but the impact will be global. With U.S. equity markets down more than 10% from the peak, could this be our first bear market (a decline of 20%+) since the global financial crisis of 2008?

Chart The Death of Breadth

The S&P 500 posted very strong returns in 2019. However, sometimes averages can be deceiving. Diving deeper, a significant portion of the return was driven by very few stocks. Strong performance by the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), along with a few other mega cap companies, lifted the average higher as the majority of U.S. stocks did not perform nearly as well.

As indicated by the top panel in the chart above, returns of the S&P 500 (gold line) have significantly outperformed the equal-weighted S&P 500 returns (black line) over the past few years. This means market breadth has decreased and more return has come from only a handful of the largest companies in the index. 

The small list of disruptor companies are increasingly dominating market cap weighted stock indices. In fact, only 10 stocks account for nearly 25% of the S&P 500. 2019 was a great year for these stocks, but any stumble going forward could have a significant impact on market returns.

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  • Heading into 2020, Allegiant expected U.S. economic growth to slow. While weak manufacturing was the root cause, now American businesses are dealing with adverse impacts from the coronavirus outbreak. 
  • To date, the coronavirus outbreak is mostly a China story. However, the likelihood of the virus spreading throughout the world has increased.
  • Global supply chains are feeling the pain. Businesses are shutting down production; inventories are declining; and now service businesses are also feeling the impact.
  • Even if only temporary, the economic shock from the coronavirus outbreak could push the U.S. economy into a technical recession. 

The Allegiant Investment Research team expected U.S. economic growth to slow in 2020. Grappled with a weak manufacturing sector, the economy was poised to run slightly above stall speed. As such, the odds are higher that a negative trigger event could push the economy into recession. Could the coronavirus outbreak be that trigger event?

Have you ever heard of the 4% rule of thumb regarding retirement withdrawals?  Financial advisor William Bengen conducted an extensive study of historical returns in 1994, and concluded that if a new retiree withdraws the equivalent of 4% of his or her retirement portfolio for living expenses in the first year and then increases the dollar amount of withdrawals every year for inflation, he or she should be able to do so for 33 years without running out of money.

Sounds pretty good, right? 

Unfortunately, it’s an oversimplification that can lead retirees down the wrong path.

Work hard, save money and you'll be able to retire someday. Most everyone has heard iterations of this statement over the years, but have you ever taken a moment to think about it?  Have you prepared yourself financially—and mentally—for the transition? What impact will retirement have on your investment portfolio?

Carl Watkins Director of Financial Planning

As an independent fiduciary advisor, the Allegiant Private Advisors team is prepared to help you navigate the transition from accumulation to distribution to help you make the most of your portfolio, and more importantly, your retirement years. Click here to read a new article by our Director of Financial Planning, Carl A. Watkins, CFP®, CDFA™, AIF®, published on SarasotaMagazine.com

Chart Current Situation vs Expectations Spread is Still Near All Time 2 19 20

With consumer confidence near recent highs, it’s a good time to examine the makeup of the survey data. The chart above displays two sub-indexes of the consumer confidence survey. The black line in the upper panel displays how consumers feel about the current economic situation. The gold line shows how they feel about the future. Since coming out of the most recent recession, consumers have increasingly felt more confident about their current situation than the future. This is not to say that consumers view the future pessimistically, but they are increasingly more confident in their present situation. Unfortunately, the spread of these two data sets typically widens before a recession and the spread (bottom panel) is currently approaching all-time highs.