New Phase of Crisis

The capital markets were performing badly enough when the coronavirus threatened to quell global growth and potentially lead to a global recession.  However, the markets turned down in a new phase over the past few days when the oil markets collapsed with crude oil sinking 20% to about $30 per barrel due to a combination of decreased demand and a price war between Russia and Saudi Arabia.  The consequential crushing of oil patch debt due to potential cash flow gaps for debt coverage has spilled over into the high yield bond market and some investment grade bond markets.

High yields spreads have widened significantly with month-to-date total returns for high yield bonds (HYG) at -5.8% and even investment grade corporates (LQD) have weakened with a -4.9% MTD total return.  The energy equity ETF, XLE, has been crushed with MTD and YTD total returns of -25.5% and -43.9%, respectively.

Additionally, causing more pain to the market, today the WHO officially declared this situation a pandemic.  The Dow today has now fallen 20% from its recent high on Feb 19 and we are now technically in a “bear” market.  A bear market is just a name, but it certainly reflects some steep losses across most sectors in the equity (and bond!) space.

I have done some selective tax loss selling and de-risking in some portfolios that can not tolerate steep losses due to a shorter time horizon than 5 years.  For accounts with a time horizon greater than 5 years, I expect to “sit tight”, but I will continue to look for selective opportunities to potentially rebalance into other opportunities to improve performance going forward.