March 16, 2020
With the rapidly unfolding situation around the spread of the coronavirus and the impact it is having, it is important that we provide regular updates as events unfold. Given the significant occurrences of the last week from a coronavirus health update, and economic and market standpoints, here are our latest thoughts.
First, health and family are the most important considerations right now and we hope that everyone is able to, and is taking the necessary precautions to ensure they can manage through this period. Remind yourself that the risk is very low for the vast majority of people, and to minimize the risk and try to help if possible, anyone you know who is vulnerable due to existing health issues.
Given the 24-7 news and media coverage of the virus impact, we certainly can’t add to the information that is being conveyed; however, we do believe we can add some perspective. One is that in the early days of any serious or crisis-like situation there is considerable anxiety and stress and that often leads to some immediate severe or panic-like reactions. That has been seen in the hoarding of certain goods by people, and it has certainly been seen in markets over the last three weeks.
A key point for everyone to be mindful of is that we are in a period over the next while where there will be a substantial amount of news related to the spread of virus, and much of it will be perceived as negative, the number of infections will rise, and unfortunately the number of deaths. It is important to understand this is exactly what to expect as we are now in the period where health agencies have the ability to test, identify and manage the treatment of those who have it. Equally important is that with the measures introduced in countries around the world to limit the spread of the virus, we will ultimately get to where China is at, with a rapid decline in the number of new cases and activity starting to return to normal. We don’t know if the time frame will be the same but we will get through the crisis.
From a stock market perspective, we have seen the most volatile markets in history over such a short period of time. Clearly the virus impact is the major cause, but we also believe other factors have contributed to the volatility such as near-record-high valuations, and the impact of the rise of passive investments and algorithmic trading programs. It has been a market environment where every sector and virtually every stock has been impacted. Unfortunately, one cannot escape the equity impact in portfolios; however, we started the year conservatively positioned with almost half the portfolios in cash and bonds.
It is true that in the short term there will be significant economic disruption and a recession. Businesses will be impacted and profits will decline this year. Equally true is that central banks and governments are implementing the necessary measures to ensure we get through this period just as they did through the 2008-09 financial crisis. Interest rates have been slashed to reduce borrowing costs, liquidity and other support is being provided to financial institutions, and assistance will be provided to businesses that are impacted the most. Governments are also bringing forth stimulus programs and financial support to help individuals.
All of these will enable economies and markets to weather this tremendously challenging period. So will ingenuity and resolve such as we have seen in the rapid development and introduction of tests for the detection of the virus and research into potential vaccines.
We understand how unnerving this environment can be. People are rightfully concerned about their health and then those concerns turn to other areas such as their investments. We are working very hard to manage through this period – focusing first on monitoring what the short-term impacts of this crisis will be, and then to be positioned for the eventual recovery.
Perhaps all clients would benefit from knowing that we have heard from some long-term clients who ask what we are buying given the current market environment. This is because we have managed through prior challenging periods like the 2008-09 financial crisis, the bursting of the Internet Bubble in 2000-02, the 1991-92 bear market and even back to the 1987 crash. And as students of investing history we have studied other periods like the high interest period in the early 1980s and the oil crisis in the early 1970s. They were all unique as is the current coronavirus-based one. But in each situation, there was an eventual recovery, albeit under different circumstances.