We don't want to downplay the near-term risks related to the coronavirus outbreak. Global growth is anticipated to slow significantly and some economies may get tipped into recession, including ours. This is going to hurt. I’ll also note that there are factors surrounding the economic backdrop with respect to the coronavirus that are unique, which means history is less of a guide. But there are definite similarities to past bear markets. Investor time horizons begin to shorten and tunnel vision starts setting in. For many, worst case scenarios become the de facto forecast by which long term investment decisions get made. As long term investors we have to fight the fear instinct.
Given the swift market correction I am beginning to see buying opportunities both here and abroad for longer-term investors. Yes, there are still plenty of near-term unknowns for our economy that will keep us on edge, jobs will be lost as will profits and capital spending, which was already weak is now going to get even weaker. That said eventually there will be a recovery, we will get through this, and pressure on the markets will alleviate.
Coronavirus: When Will It Peak?
That pressure alleviation could happen as soon as a month or two from now assuming this virus is seasonal. We don’t know if this specific virus will be seasonal but the history with similar viruses suggest that it is a reasonable assumption. There are a number of reasons that viruses are seasonal, but the main factors are sunshine, heat, and humidity. Understand though, that warmer weather doesn't mean this goes away. We’ve all had the flu in the summer at some point in the past – it just happens less often. There is also the risk that it comes back in the Fall, though we will be much more prepared if it does. In any case, what we investors care about is the trend, a slowing in the pace of cases and deaths will be very comforting for the markets. Another consideration is that just as the Coronavirus tensions ease the combined effects of monetary and fiscal stimulus could be feeding into our economy.
It is truly incredible the speed with which the markets have corrected. The S&P 500 saw its quickest fall into a bear market in history. At the same time investment grade bonds rallied. The yield on the Barclays AGG hit all-time lows. That suggests that portfolios could be out of balance. That is one of the actions we are suggesting, for long-term investments we suggest you consider taking advantage of higher priced bonds and lower priced stocks and consider rebalancing portfolios.
We would also suggest for those clients that have built up cash that they begin averaging it into risk assets.
The other thought with respect to the speed of this market decline is that it likely created market dislocations, something an active portfolio manager could potentially take advantage of. We would lean toward putting new money to work in actively managed strategies as opposed to strategies that simply track an index.
The information provided represents Touchstone’s views and observations regarding past and current market conditions and investor behaviors. The information and statements provided here are believed to be true and accurate. There can be no assurance however that the beliefs expressed herein will be consistent with future market conditions and investor behaviors.
This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.
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