SARINA Capital Fund I was down 6.9% for the month of February2020 compared to losses of 8.4% and 8.5% for the S&P 500 and Russell 2000, respectively. The coronavirus virus’ impact on global supply chain instilled fear of epic proportions in the minds of investors. In a matter of just six days, the markets lost over 11% at the end February, the fastest drop of over 10% ever in the history!
What is driving the dramatic movements in the markets is the fact that the investors in this case are at the mercy of healthcare professionals and there is no visibility on how this could end. Hence, any good news is treated with a large spike up in the markets and any bad news is treated with a significant decline. The central governments have also chimed in on the issue by slashing interest rates to spur the markets; however, their moves have not been very effective. Furthermore, making a move this early into the crisis may limit their ability to do anything in the future if this becomes a longer term issue. The reduction in interest rates has led to a sharp decline in treasury yields and another historic moment where the 10-year yield fell below 1% for the first time ever since 1871!
Reasons to Sell
Since the financial crisis of 2008, investors have been given many reasons to sell their but despite the ‘bumps in the road,’ markets are up approximately 430% since the lows we saw in March 2009.
In times of correction or bear market, we tend to look for opportunities to buy and the simple reason for that is because we remain bullish on the U.S. outlook over the long-term time horizon, that is over the next 5 to 10 years U.S. economy will do just fine.
Corrections and bear markets bring opportunities to buy some solid assets at a more reasonable price. Given the terrific performance of S&P 500 in 2019, our view was that valuation were very high for many of the companies we were interested in buying. Now that prices have come back down to earth, this correction may present a good opportunity to buy some solid businesses. We also have good empirical evidence to buy the dip. Below is a look at how markets have performed after a correction:
Of course, the narrative of “this time it’s different” is out there as we have never seen anything like this before. Today the world is more dependent on Chinese goods and never before has anything brought the global supply chain to a halt at this level! However, you can use the words ‘never before’ for every correction and history tells us that the markets do rebound. On average markets have gained approximately 10% or more in the one-, three- and five-years following a 10% correction. Anyone remember late 2018/early 2019?
In uncertain times as these, it is always important to stay focused on the long-term picture. Setbacks such as these are not uncommon in the markets and this won’t be the last time that “it’s different.” The key is to ignore the noise that is all around us and remain focused on the things that we can control.
Happy investing!
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