Heritage Wealth Advisors: Market Update

Financial markets around the world remain shrouded in uncertainty as the impact of the novel Coronavirus (COVID-19) on the global economy continues to intensify.  We are closely following the progression of the virus’ spread but are loath to speak authoritatively or make predictions with regard to something that is clearly outside the bounds of our expertise.  While the medical data continues to evolve, with cases outside of China exceeding 30,000 this week, our focus remains on the magnitude and duration of a down shift in global growth as a result of the reactions from countries, institutions, businesses and consumers to attempt to slow the spread of the virus.  These actions, ranging from a national quarantine in Italy to corporate travel restrictions in the US to school closings, will undoubtably have an impact on economic growth in the near to intermediate term, increasing the odds of a global recession.  The sharp decline in equity markets, interest rates and oil prices to start the week is reflective of this dynamically shifting view.

Our view coming into the year was based on an expectation that the combination of easing financial conditions, fiscal stimulus and a bottoming inventory cycle supported a pickup in global growth.  While we actively rebalanced client portfolios to lower equity exposures down to long term targets early in the year given strong equity market returns in 2019, portfolios were positioned to benefit from a stronger global economy.  In the face of increasingly aggressive containment measures, this view is admittedly challenged with the likelihood of a modest recession increasing materially.  In this vein, we are taking steps to reposition equity portfolios to reflect more muted (and delayed) expectations for economic growth.  A couple priorities will drive this reposition:

  • Balanced client portfolios will remain underweight long term equity allocation targets as deep uncertainty related to the ultimate impact on economic growth remains.
  • Earnings expectations for the more cyclical areas of the market will be revised lower over coming weeks while the magnitude of these revisions remains uncertain.
  • The Saudi Arabian response to Russia’s lack of coordination to better match oil supply with weakening demand may result in a protracted period of lower energy commodity prices creating stresses in the energy complex and high yield credit markets.
  • The broad based sell off in stocks has resulted in increasingly attractive valuations for high quality businesses that fit our parameters for investment.  Our approach is centered on a combination of businesses with strong long term growth prospects coupled with high quality, higher dividend paying businesses with less sensitivity to the economy.

As a result, you can expect to see additional shifts in portfolios to align with these priorities as we lower/have lowered cyclical and index based exposures to reflect these views while selectively adding to less cyclical businesses.  We will continue to reach out to clients individually to discuss your specific allocations and positions in light of these changes.  In the meantime, please do not hesitate to reach out to any member of the Heritage team with questions.

On a non-investment note, the health and safety of our team and our clients is our first and highest priority.  In that context, the Coronavirus (COVID-19) and our response to the risks it poses is foremost in our minds.  We continue to monitor updates from the U.S. Centers for Disease Control and Prevention (CDC) and the Virginia Department of Health as our primary sources for information and guidance. Should it be necessary, we will be prepared to modify hours of operation, alter our schedule of activities or restrict access to our offices.