Near-Term Picture Darkens
Evolving news and data compels me to entertain a more challenging near-term view of the Coronavirus outbreak. I don’t want to come across as too negative, as I am still approaching from the perspective of a long term investor. That said, even if containment is achieved in the next month (increasingly unlikely), it is probable that supply and demand shocks will have a marked impact on the global economy. The risk is also increasing of a global pandemic. The more widely the virus spreads, the greater the impact. It is not the virus itself that is so damaging, it is the strong measures taken to contain or minimize the outbreak that are creating significant economic costs. The number of cases outside of China are growing and are geographically diverse which raises alarms and creates the perception that it could break out anywhere. It didn’t help that the U.S. CDC stated that "it's not so much a question of if this will happen anymore, but more really a question of when it will happen — and how many people in this country will have severe illness." All of this suggests that the market’s fears and uncertainties are not going to subside for at least a few months. Volatility is likely to remain elevated with some investors choosing to abandon equities due to fear of short-term losses.
Wash Your Hands & Take a Breath – Expanding Our Horizon
Instead of getting caught up in the day-to-day and month-to-month, which are tremendously difficult to predict, it is useful to think about where we could be a year from now.
- A year from now, if not sooner, it is very likely that a treatment will have been found for COVID-19 and availability of that treatment is increasing. That should meaningfully reduce the fear of this virus and reduce the need (and economic cost) to contain it.
- A year from now, we are also likely to be reading about different vaccine trials and becoming hopeful about their availability.
- Some economies may be coming out of a mild recession (Italy, Japan and Germany are pretty close to falling into a recession), but there will be a tremendous amount of pent up demand for goods and services built up over the past year (around the globe). As fears and containment efforts die down, anticipation of the unleashing of that pent-up demand will stir risk assets.
- Meanwhile, should Trump still be in office, he is likely to be opening the fiscal floodgates with tax cuts and infrastructure spending galore.
It's easy to become consumed with the short-term impacts on the value of our portfolios when traumatic events occur. We may be best served by re-focusing our lenses on longer horizons and taking steps like those laid out below.
I see three rational actions for most investors to take now depending on their situations.
- For investors who are well diversified with investment exposures in line with their strategic allocations, this seemingly indiscriminate sell-off has created a lot of opportunities for active managers. Prefer Active over Passive.
- For investors with long-term goals that have been raising cash due to late cycle fears, now may be an appropriate time to consider deploying capital – but not all at once. Averaging-in over time is more psychologically palatable for most investors, particularly in times of market trauma.
- Investors that have let their winners run (perhaps due to reluctance to pay taxes), should recognize that their allocations may be out of sync with their risk capacity. Some may feel it’s too late with the market already pulling back so dramatically – but the reality is that most equities have retraced less than six months of price-run up.
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