The US equity markets have declined signifcantly as the corona virus triggers economic shut down and the expectation of a recession. The US economy has already shed jobs and will continue to do so as entire industries including airlines, energy and hospitality continue to shed employees.  We believe that oil prices may settle around $40 a barrel if a deal between Russia and the Saudi's is reached.  Without that, prices could decline to $10-15 per barrel with over supply and reduced demand contributing to the fall.  With the Federal Reserve pumping money into the credit markets and the government providing addiitonal fiscal stimulus we may make the downturn more shallow.  However, manufacturing was weak and the global economy was slowing prior to the virus and oil price collapse so the rebound will not be immediate.

We recommend a defensive posture of quality large cap stocks and short duration fixed income using this sell off to increase the quality of your portfolio.  Avoid high PE names which could still correct further as the growth estimates are revised down.  Brexit fears in Europe have abated though much uncertainty still remains The US recession will be reflected in a weaker dollar resulting in imported inflationary pressures as Asia recovers more quickly than the US.  Increased government spending will help to offset the slowdown but the record deficits are unsustainable and will result in higher interest rates long term which will undermine the case for equities.

We continue to be extremely cautious heading into the election year.  The phase I trade deal with China is only a partial rollback of tariff damages and there is a possibility of resistance to the deal within China as a rebuke to the Trump administration.  Recent tensions resulting in the expulsion of US reporters has inflamed relations as well.  In addition, the election year brings risks that are not fully priced in to the current market which is still not pricing in the possibility of the democrats taking both the house and presidency which would cause an estimated 20% drop in equities on the fear of increased taxes.  While we still don't believe this is likely it should be taken into consideration.