Unfortunately, my concerns expressed on Monday this week have further materialized with the latest move by the U.S. government to suspend all travel to Europe for the next 30 days as of midnight today.
One has to understand that there are nearly 400 daily flights from Europe to the United States, transporting almost 73 million passengers per year. It is the most popular route to and from the United States. Hence, this will have a significant effect not only on airlines and airports but on ground handlers, caterers, Uber and taxi drivers as well as restaurants and hotels, remaining at low occupancy for quite some time. Consequently, it is going to put even more of a burden on any business associated with the tourism industry in general.
On top of the travel ban, which in our view was a mistake since we believe it is not going to avoid the virus from spreading and was only done for political reasons and optics, the closure of theatres, sporting venues, amusement parks as well as airlines reducing overall capacity by up to 50% and some cruise line companies shutting down completely for the time being, have sealed the U.S. economy's destiny for 2020. We believe that the country will be hit by a recession in the second quarter which will drag into the third quarter of this year. Unemployment numbers will rise quickly and at that point, the reelection of the sitting President will become more unlikely and lead to further uncertainty in the market.
Hence, volatility for equity markets is likely to remain high and an overall decline by 30 - 40% since the all time high this year is possible in-light of a looming recession.
Another development that should be watched is related to a liquidity issue between major banks as interbank lending has slowed down significantly. The move by the Federal Reserve this week to increase liquidity for the repo market (overnight and short term liquidity market for interbank lending) by $1.5 trillion - or $1,500 billion ($1,500,000,000,000) - is highly concerning. This implies that the banks no longer trust each other's balance sheets and could point towards a major financial crisis at some point down the road. For example, Boeing has drawn-down its full credit line of almost $14 billion this week and Blackstone, the world's most successful and largest private equity company, has instructed its companies to draw-down its credit lines as much as possible for the time being, avoiding a potential liquidity crunch (according to Reuters).
Given these latest revelations, we recommend targeting a rather conservative equity exposure within each strategy implementation (equities < 75% for a growth-, < 40% for a balanced-, and < 30% for a conservative mandate) as well as ensuring a healthy diversification in precious metals and alternative investment classes. Also, we recommend to keep on buying good value and dividend yielding stocks in increments and over time while the downtrend and volatility in the stock market remains.
Please do not hesitate to contact us if you have any questions.
Oliver E. Hohermuth, Chief Investment Officer