BCA Weekly Commentary 3/20/20
SUMMARY. We believe TWO key events will be critical in turning negative sentiment & fear so as to abate the selling in markets: 1) Drug Trials; 2) Defining the Unknown. Markets continue to be driven by virus cases reported,additional steps to restrict movement of citizens as well as forced business closures. However, we believe that focus is about to shift to drug therapies and vaccines which are expected to report initial clinical trial results in weeks. At a press conference, the President said they have already begun ordering "millions" of doses of antimalarial medicine Chloroquine which has had success in combination of HIV drugs (see NYPOST). All of these drugs have gotten prior FDA approval for use and need only be trialed for use in combating the virus. Based on our research and this press conference the FDA/Gov't may announce within weeks standardized protocols for the use of these drug combinations injunction with trial results. Fear appears to be worse than the actual virus and once a protocol of drug therapy is established that will reduce the death rate, fear reduction will follow.
In addition, the second factor in fear reduction may come as we enter earnings season in a few weeks which will define the UNKNOWN impact of the virus fears on actual corporate earnings. We suspect, many company guidance will be for extreme caution in 2Q as the full impacts of earnings maybe felt. In addition, we suspect many companies will use the quarter to load it with write-offs that will make subsequent earnings look better. Those companies who prove to have prudent cash management & strong balance sheets with no need for external financing will recover first. The point is once investors can define the earnings risk they can the focus on the rebound of those earnings which should begin in 3Q.
INVESTMENT IMPACT. Our overall view is the impact of the virus as temporary, pushing out growth into 2H20 as additional stimulus from central banks may mute its long term impact. We believe focus in the rebound vs the slow down is about to occur thus we we have maintained equity exposures. During the week as our conviction grew of the above, we began over weighting technology for the first time in years especially in our growth models.
For more insights see our website and disclosures found there at BCA. As always contact us for further explanation of how these events can effect your finances.