Human beings are a pattern-seeking species – hence the temptation to equate our current circumstances with previous bouts of economic distress and market volatility. This is, however, a difference of both degree and kind, as if 9/11 happened on the same day that Hurricane Sandy made landfall, all of which in turn took place during the Global Financial Crisis. We are accustomed to blame disruptions like this on either tight monetary policy or Wall Street excesses. This time is genuinely different, which makes it impossible to place the present experience into any sort of historical context. This robs us of whatever comfort or guidance history might otherwise provide.
Markets hate uncertainty like this, and it is hard to imagine more uncertainty than a viral crisis without a vaccine, which will impose an unknown cost on the economy for an unpredictable period of time. Add an oil price collapse into the mix, and you have a pretty good recipe for market chaos. Two of the worst days in the history of the S&P 500 index have occurred in the last week. As of today’s (March 18) close, the S&P 500 index has moved by 4% or more for 8 consecutive sessions, the longest stretch of daily volatility on record. The S&P 500 is now down 28% from its high of February 19 and down 24% year-to-date.
Fixed income, which most investors consider their anchor of stability, is demonstrating similar volatility. The 10-year Treasury bond started the year with a current yield of 1.92% and fell to a low of 0.54% on Monday of last week before closing today with a yield of 1.20%. Everything is in a bear market.
Market volatility, although unwelcome and disconcerting, is not our enemy. We invest – in any asset class – by focusing on value and allowing price volatility to create the opportunity to buy that value on sale. We readily acknowledge that value is harder to establish when economic reality is so uncertain, and this is precisely why we insist on buying assets at a discount to their intrinsic value.1 The gap between those two measures can be a source of return as discounts narrow and also provides a margin of safety2 when values are uncertain.
Our portfolio managers are carefully looking for opportunities created by this market disruption one security at a time. No one at Brown Brothers Harriman will call a market bottom, and our asset allocation policy is not based on an assumption of when this will end. We are confident, however, that it will, and that our focus on acquiring quality assets at appropriate values is the right way to manage wealth in this, or any, economic environment.
We will continue to communicate with you as events unfold and as monetary and fiscal policies are put in place to mitigate the secondary effects of what is primarily a health crisis.
Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations. Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020. All rights reserved PB-03415-2020-03-18
1 Intrinsic Value represents what we believe to be the value of a security based on our analysis of both tangible and intangible factors.
2 Margin of safety: when a security meets our investment criteria and is trading at meaningful discount between its market price and our estimate of its intrinsic value.
Past performance does not guarantee future results.