We want to provide you with our insight and outlook in the wake of recent market events.

Although COVID-19 has been defined by the World Health Organization (WHO) as a pandemic, we believe markets have over-reacted to news reports about the virus. In the past ten trading days, the Dow Jones Industrial Average has experienced swings in excess of one thousand points. This type of volatility is exhausting for any investor.

Over the longer term, stocks trade based on expected corporate earnings. Markets will trade in an orderly fashion when analysts and investors have confidence in reported data. However, when investors are uncertain as to what the future will be, markets can move based on fear of the unknown, and as a result, volatility increases. We believe that the markets are moving based on COVID-19’s expected effect on the global economy. Global GDP will certainly be interrupted by corporate closures, production slow-downs due to quarantined workers, and a slowdown in consumer spending. The biggest question is how long will these interruptions last, and can even a short retraction in activity push the global economy into a recession?

The World Health Organization estimates that worldwide, annual influenza epidemics result in about 3-5 million cases of severe illness and about 250,000 to 500,000 deaths.[1] Until the virus’ spread is eradicated or slowed, it is too soon to conclude if the current economic disruption will lead to a recession. While consumers may cut back on large gatherings, flights and other activities, they will not stop consuming all together. In the past, lower gas prices proved stimulative to new car sales and increased visitation to driving destinations within the United States.

The markets were shaken by trade wars and the fear of a global recession during the fourth quarter of 2018. The S&P 500 declined 19.78% from the high on September 20th to the close on December 24th. As we mentioned in our Quarterly Letter to clients in January 2019, our view was that economic data did not support the market speculation that a recession was imminent. The S&P 500 shook off trade war issues and ended 2019 with a strong 31.22% return.

We believe that the COVID-19 epidemic will have a similar short-lived impact on financial markets. In the short run, fear and uncertainty may rule, but when the economy absorbs the pent-up demand caused by quarantines and business interruptions, the markets should rebound strongly. Here is a chart depicting the returns of the MSCI World Index after past epidemics.

Source: Schwab.com, “Spreading Global Virus Cases Shock the Stock Market”, February 24, 2020. https://www.schwab.com/resource-center/insights/section/market-volatility

Financial markets will continue to react to daily “new case counts”, and volatility will remain high while the world awaits a vaccine or at least a decline in the spread of the virus. Our research driven portfolios own companies with strong cash flows, low debt and good dividend yields. In addition, corporate balance sheets are stronger than ever, and some will argue so, too, is the United States economy with historically low unemployment. We will continue to stay disciplined, look for opportunity to reduce risk in the portfolio, and add to positions in good companies.

In forming our investment thesis, we take into consideration what we know and what we do not know.


  • As of this letter, there have been roughly 135,000 people diagnosed with 5,000 deaths from COVID-19.
  • It’s more difficult to detect than past epidemics because people do not show symptoms when contagious.
  • U.S. confirmed cases and deaths will likely increase over the near term.
  • Both China and South Korea were impacted early on. Reports indicate that the disease is under control in both countries.
  • We are witnessing the largest global government health and economic response to any epidemic in recent history.
  • US equities are currently in a bear market. Despite comments in the financial press, this is not the first one since the Financial Crisis. We experienced more than a 20% decline in the Fall of 2011 and the 4th quarter of 2018 (from peak to trough).
  • Past performance shows that if investors miss only a handful of strong “up” market days, returns are dramatically affected.


Past performance is no guarantee of future results. Source: FMRCo, Asset Allocation Research Team, as of January 1, 2019 https://www.fidelity.com/viewpoints/investing-ideas/six-tips

  • How long will it take for both Europe and the United States to reach containment? Are there lessons to be learned from China which will allow us to combat this virus in a more efficient and faster manner?
  • Will the virus slow the demand for oil and/or have an outsized negative economic impact?
  • Will people change their travel habits permanently?

Our Beliefs:

  • Concerted global efforts will get the virus under control.
  • Low interest rates and oil prices should be stimulative to the world economy.
  • The market is now inexpensive with a few areas of extremely attractive valuations.

We understand that highly volatile markets shake investors’ confidence and cause them to re-assess their appetite for risk. However in reviewing your portfolios, we would caution you from making any major changes to asset allocations now, as the asset mix that was created for you includes both bull and bear market scenarios. We encourage you to keep an open dialogue with your portfolio manager. We understand that some of you do not want to meet face to face until the virus threat diminishes. We have the capability to conduct meetings via video conferencing and we are available at any time to discuss the markets and your portfolio.

(1)Influenza (Seasonal) World Health Organization https://www.who.int/news-room/fact-sheets/detail/influenza-(seasonal)


Past performance is no guarantee of future results. There can be no assurance that any of the securities referred to herein were produced for or remain in portfolios managed by Granite Investment Advisors. A complete list of all Granite Investment Advisors’ recommendations within the preceding year is available upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities described herein.