Bourgeon Capital's Market Update

Published February 27, 2020

An Update on the Coronavirus and Markets

We wanted to reach out again to give you an update on our current thoughts given the increased volatility of the markets and continued movement of the pandemic virus around the world and now to the US specifically. We are obviously not infectious disease experts so we cannot offer clear and concise information on the virus itself. But, we have been spending a lot of time listening to experts, reading various articles and following research firms who have a detailed knowledge of the number of cases, economic effects as well as can be discerned, potential supply chain issues, etc. We will continue to use that knowledge to help manage your assets with capital preservation most in mind in times like this.

In our last Coronavirus update, we told you that we expected things to probably get worse before they got better. So far that is true. On February 27, 2020, the S&P 500 was 12% off its all-time highs and down around 7.5% for the year. Many individual stocks have declined over 20% over the last 4 weeks as investors seemed to be panicked by the short term circumstances that have taken place. We are not being dismissive of the issues and we are saddened by the loss of life and the problems that have arisen from the impact of the Coronavirus when we last wrote to you. We thought it would be hard to really know where things would go, but we felt that with our reasonably high cash levels and good equity positions that we were positioned well given our long-term investment horizon.

Certainly the fear and uncertainty has increased, particularly this week as the virus continued to rapidly grow in Korea and spread to Italy and the Middle East. The stock market, which had been complacent for some time, suddenly focused on the supply chain disruptions, shortages, withdrawals of earning/revenue projections from major companies like Apple, MSFT etc., and further media uproar here in the United States.

So where does that leave us as investors? We know what we don’t know. We know that there are unknown social and economic issues related to the virus both here and abroad. Fear has taken hold to some degree, particularly in the short run, and that is never good for equity markets. However, when markets get like this, it is usually a very good opportunity for long-term investors to begin to put money to work. While it’s true that many companies will have difficult times in the next few quarters if not more, they will survive, grow and prosper over the next several years as the world recovers. We will see short term issues, but their leadership positions should cause them to continue to perform well over the next 3-5 years. Their long-term prospects have not been significantly altered because of happenings in the last 1-2 months.

As we discussed in our last quarterly letter "Only strong swimmers should enter these waters", the stock market was potentially vulnerable to a shock in the short-term because it was expensive relative to history. Most of the increase in valuation was driven by the worldwide liquidity of the central banks, and the low interest rates and inflation everywhere. We had seen some cracks in risk appetites on and off over that last couple of years primarily led by the trade wars of the last 18 months. Many investors started to focus on the overreliance of the US on supply chains in Asia, and the potential end of globalization as we had known it. But in December, just as we were getting some trade relief from the China/US trade compromise, the virus struck, and a new more powerful light was shown of the potential weaknesses and vulnerabilities of those supply chains and their place in global growth. Unfortunately, this was just as the world was seeing green shoots and people expected a worldwide recovery in 2020. Obviously that is now postponed.

At this point, we are optimistic that this pandemic will wind its way through the world, cause a multi-quarter slowdown, but not a worldwide recession. We think worldwide central banks will likely come to the rescue once again to ease, providing liquidity support for businesses and valuation support for the stock market. If it turns out that the virus is like most flu-like virus, warm weather should slow it’s advance and it may wind down into the summer months, allowing time for the creation of a vaccine. Many smart people and companies worldwide are working on a solution, but they often take time. We can only hope for more speed.

At the beginning of this rout we had 10-15% cash in most portfolios, and we have started to gradually use some of this cash to add to stocks that we really like for the long-term. We are proceeding slowly as we think these Coronavirus led market issues may go on for a bit longer. We are sharpening our pencil on companies with growth drivers in artificial intelligence, gaming, electronic vehicles, defense, 5G, data centers, healthcare, and robotics.

We are very mindful that you have entrusted us with your assets and that we are charged with the dual role of both making a good relative return and at the same time protecting your capital.

 Sincerely,

Important Disclosure:

This letter should not be relied upon as investment advice.  Any mention of particular stocks or companies does not constitute and should not be considered an investment recommendation by Bourgeon Capital Management, LLC.  Any forward-looking statement is inherently uncertain.  Due to changing market conditions and other factors, the content in this letter may no longer reflect our current opinions.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this letter will be profitable or suitable for your individual portfolio.  In addition, past performance is no indication of future results.  Please contact us if you have any questions regarding the applicability of any matter discussed in this letter to your individual situation.  Please contact us if your financial situation or investment objectives change or if you wish to impose new restrictions or modify existing restrictions on your accounts.  Our current firm brochure and brochure supplement is available on the website maintained by the Securities and Exchange Commission or from us upon request.  You should be receiving, at least quarterly, statements from your account custodian or custodians showing transactions in your accounts.  We urge you to compare your custodial statements with any reports that you receive from us.

For more information, please contact us: 

777 Post Road

Darien, CT 06820

203.280.1170 | info@bourgeoncapital.com