January 27, 2020

Chadd Mason, CEO The Cabana Group

Markets React to the Coronavirus Fears

Just as quickly as the drumbeats of war with Iran quieted, we became overwhelmed with news of a rapidly spreading potential pandemic coronavirus. The virus started in China and has now been found in numerous countries around the world, including the United States. It is currently projected to be less severe than the SARS virus, which started in 2003 (also in Asia) and ultimately infected 8,000 people and killed 774 of those. These viruses are related to the common cold and pneumonia. The vast majority of those infected recover with mild to moderate symptoms. To put this in perspective, influenza infected more than 43 million people and killed 57,000 in 2019. The flu killed 80,000 in 2018. If you want to worry about something, the flu would be a worthy candidate.

While a worldwide health epidemic can certainly impact trade, travel and business activity, it is these factors’ impact on corporate earnings that ultimately dictate asset class performance. Equity markets around the world have sold off as word of the virus reached the forefront of our collective attention. The S&P 500 has dropped more than 3% in the past four trading days. China has dropped 10% in the face of quarantines and restricted travel during the Chinese Lunar New Year. Energy stocks have also taken a hit as investors predict reduced demand for fuel. Bond yields across the yield curve have followed suit and dropped precipitously. The 10-Year Treasury Note is trading at 1.60% after being as high as 1.90% two weeks ago.

So, is all this coronavirus concern justified or is it just a good excuse for some profit taking after a big unabated run -up in stocks? I mentioned last week that markets were priced to perfection, with investors clearly expecting strong earnings this month. According to FactSet Financial Data, 85 companies within the S&P 500 have reported Q4 2019 earnings and 62 of those (73%) have beaten earnings estimates. Out of those reporting, 57 (67%) have reported revenues above forecasts. Pretty good numbers indeed. Year-over-year average earnings growth remains at positive 8%. The question now becomes whether the fallout from the coronavirus is going to cause these numbers to fall going forward. Of course, no one knows for sure what can happen when a heretofore unknown virus makes inroads into the human population.

All we can do is look to history for some guidance (just like we did earlier this month when trying to discern whether military conflict was bad for corporate earnings and equity investments). See Page 2 for a chart courtesy of Dow Jones, which tracks U.S. market performance over the ensuing 6 and 12 months, following the occurrence of an epidemic as described by the World Health Organization. Interestingly, in almost every instance going back to 1981 and the AIDS epidemic, markets are higher after both 6 and 12 months. The same is true of international markets, as evidenced by the second chart on Page 2, provided courtesy of Charles Schwab and FactSet.

The fact is that epidemics don’t matter with respect to equity markets…until they matter! When and how they might matter is anyone’s guess. We will continue to watch earnings as they roll in and be prepared to respond to changes in the prices of broad asset classes. For now, we remain Moderately Bullish at Cabana.

IMPORTANT DISCLAIMERS

This mateIARl is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this mateIARl are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not Promised as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

This mateIARl may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no Promise that any forecasts made will come to pass. Reliance upon information in this mateIARl is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no Promise that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is    available upon request or online at www.adviserinfo.sec.gov/.

The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be   representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. IARs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.

The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. IARs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period.  Visit www.fa-mag.com for more information regarding the ranking.

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). In addition to the firm’s third-party verification, six of Cabana’s core portfolios have been performance examined consistent with GIPS® standards. The Global Investment Performance Standards are a trademark of the CFA Institute. The CFA Institute has not been involved in the preparation or review of this report/advertisement. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS® standards. Verification does not ensure the  accuracy of any specific composite presentation unless an independent performance examination has been conducted for a specific time period. Past performance is not indicative of future results. Due to various factors, including changing market conditions, the portfolios may no longer be reflective of current positions.

No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no Promise that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.