It seemed remote that OPEC and Russia would engage in an oil price war. It is contrary to their self-interests but nevertheless that is what has happened. In last week’s blog the Bull stated that another leg down in the stock market was possible, if improbable. The improbable has happened. On top of Coronavirus concerns a collapse of oil prices and its implications for the energy sector was just too much for some investors to bear.
With the massive decline on Monday the stock market is now clearly in correction territory. Two black swan (highly unlikely) events were just too much, in spite of a good underlying economy and business conditions. Now we all must accept that the future is now on a different course.
At the beginning of this year, Riverplace Capital rebalanced most accounts to reduce risk. In addition, some stale positions were replaced with stronger opportunities. Allocations were brought back into line to further improve resiliency. Cash levels were also reviewed to ensure adequacy in income accounts for more than enough cash flows. We have recently upgraded a few more positions to ensure that we have the strongest companies. Now we simply will see this downturn through and not take precipitous action that would damage eventual recovery.
There are positives in the current mess. Mortgage rates will decline providing refinancing opportunities. Energy prices are much lower resulting in savings for consumers. More stimulus, both monetary and fiscal are likely. The U.S. dollar has been weakening against the currencies of some of our major trading partners making our exports more competitive. The economy was in good shape, if not gathering strength, before all this happened. These don’t play into the current fearful environment, but they eventually will. In the Bull’s 41 years of managing money, many crises have come and gone; this one will too. Stay steady, my friends.
The Lonely Bull