Too Much to Overcome in the Near Term

As investors turn their calendars to 2020, we reflect on the previous decade in this holiday-shortened trading week. Ten years ago, the global economy was in the depths of the financial crisis and investors just finished posting negative returns for the decade (the S&P 500 fell 9 percent from 2000 to 2009). While this experience scarred a lot of investors, equities bounced back and, if you stayed in the market, your return was over 250 percent, or 13.5 percent per year since then.

The bulk of returns was focused on Large-Cap Growth companies, specifically Technology stocks. Taking a step back, investment returns are dependent on earnings growth and the price you pay for that growth. Growth stocks are companies with above average earnings growth. However, investors typically pay a higher price as a result. In comparison, value stocks are companies that have below average earnings growth and are relatively cheap. The chart below highlights the last twenty years and compares value stocks to growth stocks using the Russell 1000 Value and Growth indices. When the chart is increasing, value stocks are outperforming growth stocks, and vice versa. From 2000 to 2007, value stocks did meaningfully better than growth. Since the financial crisis, growth did meaningfully better.

2018 and early 2019 were perfect examples of this phenomenon. The market correction in 2018 saw the S&P 500 fall 19.9 percent on fears of a global slowdown, and a “tone-deaf” Federal Reserve. Stocks bottomed on Christmas Eve and recovered all of their losses by the end of April of 2019. Simply holding through the volatility was rewarded handsomely during the balance of the year.

Corrections are much less sinister than the average bear market, as depicted in the chart above. Bear markets are usually associated with a change in the economic cycle, meaning that the market is moving from economic expansion into a recession. We view bear markets as tradeable events and position portfolios more conservatively when we see a recession on the horizon. That is not the case today.

We believe the U.S. economy is on solid footing. The Purchasing Manager Indexes (PMIs) in the rest of the world have started to bottom and are expanding again. Our belief currently is that the Coronavirus will slow down this recovery process … not derail it. Coronavirus will definitely have a bigger impact on China and Southeast Asia, but may slow first quarter growth in other countries around the world. We believe the U.S. economy and consumer are in solid position to grow for an 11th connective year.

Week in Review and Our Takeaways

• The S&P 500 declined 2.2 percent on the week as the market continued to digest the implications of the Coronavirus

• We believe the Coronavirus could lead to a correction in stocks from recent market highs

• We don’t believe that the economy is heading toward a recession in the next 12 months and don’t deem any selloff as a tradeable market event

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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