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Our Thoughts on the Coronavirus Market Sell-off

Posted February 27, 2020 by Denis Smirnov

It has been a very tough week for the market driven by fear of global Coronavirus pandemic. Stocks of all stripes are down around 10% since the start of the sell-off on February 20 (Exhibit 1). Oil and U.S. stocks are taking it the hardest, while traditional safe-heavens of gold and government bonds are doing good job of mitigating the risk. To put things in perspective, we added performance since the start of 2019 – even with this big drop investments are still up big over the past 14 months.

What does this mean for your portfolio? We put together analysis of hypothetical global portfolios of various exposures to stocks and bonds. Just to be clear, these are not our client actual results but the returns on your portfolio should be similar to the corresponding stock/bond allocation below (Exhibit 2). So a 60/40 portfolio is off about 5% in the past week, painful but not horrible. And it’s still up 16.6% since beginning of 2019.

 

Unlike prior bouts of market volatility, the current slide has the added fear of a global pandemic.  That possibility makes it even more difficult to separate the news from investing.  Just as it would be next to impossible to identify investments that could benefit from a pandemic (and there are plenty of “experts” doing just that), we believe it would be imprudent to allow the impact of COVID-19 to dramatically change our long-term investment approach.  It is still completely unclear whether the virus will cause widespread deaths or simply become part of the annual cold and flu season. Regardless, the disruptions global supply chains, travel and widespread quarantine are having a real economic impact. For some context, here is the chart of various epidemic episodes in the past few decades (Exhibit 3). Of course, we don’t know how bad it will get compared to those outbreaks but it gives us some idea of what might happen.

As always, it is helpful to remember that market drops and corrections are inevitable and can actually be healthy.  In fact, it is due to volatility that equity investors get “paid” over time for accepting risk.  Our philosophy is to look beyond that market volatility, whatever the cause, and we have worked with you to maintain an overall portfolio allocation that is intended to weather these kinds of gyrations.  In other words, your portfolio has not suffered anywhere near the full stock market drop because the allocation includes fixed income holdings that have actually rallied as interest rates have crept back down during this period.   Our process for managing cash flows and rebalancing portfolios prevents us from selling into weak markets so that the decline is not compounded and portfolios are better positioned for eventual recovery.

You may notice that some of this message is identical to our message from 2015, and we sent similar messages in 2008 and 2011 when the market also suffered a series of steep one-day drops.  Despite the market decline in the fourth quarter of 2018, it feels like a long time since the market faced the possibility of a sustained decline. Of course, we can’t expect to know if the decline has ended, or if or when the market will recover some of its losses.  We do continue to believe that stocks offer the best opportunity for long-term growth.

So, as cliché as it may be, we intend to stay the  course.  As always, we are watching market and economic developments to serve as a resource to support your long-term goals.

Please let us know if you would like to discuss the markets in more detail by phone or in person.

 

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