Markets have continued to sell off as investors are digesting a continual flow of information around coronavirus cases, potential responses of fiscal and monetary stimulus, and precautionary measures being taken to contain the virus. This seems to have reverberated into a greater fear in the market with some investors electing to capitulate and reduce their exposures.
When markets are driven by selling pressure, the downside can become magnified by a lack of liquidity as everyone is trying to trade in one direction (selling). To us, this appears to be what is occurring and it can take time for the market to clear. On top of that, there is bound to be more news related to the coronavirus, so regardless of what happens in the market over the next few days, it’s likely that volatility will remain elevated in the near term.
On the back the violent response from the market, we are starting to see attractive bargains emerge. The shoot first response has created some unique anomalies that we haven’t seen since the financial crisis. For example, a rush to sell municipal bonds has pushed up interest rates on these bonds at a much greater velocity that what is occurring with Treasuries. Today, the yields on AA municipal bonds range between 180-210% of the comparable yield on Treasury bonds. A month ago, these bonds were trading at interest rates of roughly 80% of Treasuries. Opportunities such as this are becoming more apparent and we are spending our time trying to identify them so that we are prepared when the dust settles.
It’s hard to not feel fear when others are acting on theirs. We are more excited about the long-term opportunities based on what we are seeing today but recognize it will take time for the market to return to an equilibrium of buyers and sellers. Our Chairman reminded me today of a great quote by famed investor, Sir John Templeton, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”