US Equity Market Update on Recent Volatility: Three Reasons for Optimism

Assessing the duration and extent of the impact on the US economy is challenging at this time, but despite the uncertainty, we see several areas that could provide support in the coming weeks and months.

• First, when we look at China, where the virus originated, new cases of the virus are slowing, people are returning to work and consumers are starting to resume traditional spending patterns. In Europe and the United States, suppression strategies should begin to “flatten the curve” and slowly return daily life to normal.
• Second, we expect additional monetary and fiscal stimulus in the coming weeks in the United States and globally. This follows on the Federal Reserve’s recent rate cuts and should provide additional support for the economy to manage through the slowdown.
• Third, the turmoil in global oil markets is causing great uncertainty and is impacting the energy sector globally; however, it will also lead to lower raw materials costs for many companies and lower energy prices for consumers.

Consumer Fallout

Our biggest concern, and one we are monitoring closely, is how the COVID-19 disruptions will impact US consumer behavior. Presently, containment measures (e.g., store and factory closures, travel restrictions and quarantines) are in effect to slow the spread of the virus. These measures are likely temporary in nature (months not years), though the duration of these measures is an important question.

The US consumer has been the driving force behind the economic expansion of the last decade, benefiting from low inflation, strong employment and rising wages. While we don’t see any long-term fundamental reason for a change to that backdrop, near-term data on consumer confidence and employment are expected to weaken significantly. Once these disruptions moderate, we will be actively evaluating the pace at which the return to normal daily life resumes.

Given the market environment, it is important to reiterate that corrections have been a routine occurrence throughout financial market history. These periods of market volatility and economic uncertainty are challenging to navigate as investors, but frequently have presented excellent investment opportunities for active managers with a careful eye toward risk management.

We are proceeding carefully, but already have been seeing opportunities to initiate or add to positions in what we consider to be high-quality, long-term growth companies. We will continue to keep our investment focus on high-quality companies identified through fundamental research.

As always, we seek those that we believe are best-in-class companies levered to multi-year growth trends and disruptive innovation themes. We believe these types of investments can weather the current volatility well and generate solid risk-adjusted investment performance over a long-term horizon.