COVID-19: The Tiny Bug with a Big Bite
February 27, 2020
The Tiny Bug
With the world seemingly on the brink of panic with regard to COVID-19 virus, I thought I’d lend my thoughts on the financial markets and portfolio strategy in the hope that anyone who takes the time to read this might find my insights of some value.
First, a few perspectives on the virus itself. It’s not particularly deadly to humans, and in fact, successful viruses tend to NOT kill their hosts. Generally speaking, a virus will mutate into a milder version over time. However, it’s a new (i.e., “novel”) virus for our species, and as such, no one has developed immunity. And this one seems particularly adept at finding new hosts to infect.
The issue, therefore, is not that we are facing a mass mortality event. The more impactful issue is that a rapid increase in the infection rates puts A TON of people in bed with Nyquil, Kleenex and Maury Povich on T.V. at the same time, potentially overwhelming our healthcare system. Efforts to quarantine people is an attempt to slow the spread to a more manageable rate of infection – NOT to avoid mass mortality. It’s important to keep that in mind so you don’t panic needlessly.
The Big Bite
However, these efforts to slow the spread of infection are bringing businesses, production and consumption to a stand-still – quite literally shocking economic systems. This is a particularly hard hit to world economies that were already fragile, including China, the epicenter of the outbreak.
Not only has China’s economy been slowing prior to the COVID-19 outbreak, but since the last novel virus outbreak, SARS, their economy has become much larger and far more globally integrated; it is estimated that China’s economy represents now almost 20% of the world’s total economy. So, even if there is not a widespread outbreak here in the U.S. and elsewhere, other countries have most certainly become more interdependent on them.
The bottom line is that as I write this, it’s become clear that recession will not be avoided in Europe and Japan. Consumption around the world has been declining, and the U.S. will definitely take a hit on GDP from this COVID-19 outbreak.
The question becomes, will this cause the U.S. to slip into recession, bringing the longest economic expansion and bull market to and end? The answer is, well, I don’t know, but we were certainly already headed in that direction.
It’s helpful to recognize that the U.S. manufacturing sector seems to have been in a recession for about a year now, hampered by unresolved trade wars and tariffs. A strong labor market has kept unemployment low, and consumer spending robust so that our economy has continued to grow despite the manufacturing slowdown.
But there have been signs that things were beginning to turn downward, even before COVID-19. Our GDP growth has been slowing, and corporate earnings estimates are dropping. The services sector contracted recently for the first time in four years, and corporate layoffs have increased 28% from January 2019 to January 2020.
That’s the bad news. The good news is our government and central banks have tools that can help alleviate economic downturns. In the short run, the Federal Reserve bank can (and probably will) move to lower interest rates again sometime in the near future. From a market perspective, lower rates will alter the valuation metrics for equities, typically giving rise to higher prices for stocks. Moreover, the Fed can, and already has been, increasing their balance sheet of bonds to help put more liquidity into the system.
Also, in the short run, the government can stimulate economic activity by spending more money than it has on hand – or, “debt spending”. In the long run, however, this increases our government debt load, which is already at record levels, and will have a deleterious effect on GDP growth over time.
The Prepared Investor
Currently, the S&P 500 is down around 10% from its all-time high of about 3,386. Is a 10% correction in a bull market healthy? You bet it is. Generally speaking, we wouldn’t be entering a bear market until losses are 20% or more from the high, or if the S&P 500 falls to around the 2,700 level. Time and events will tell whether we are headed for a bear market, neither of which are in our control.
But when it comes to your investment portfolio, being well-positioned to ride out a market storm relates not only how you’ve allocated your investments, but also how you react during times like these.
There is NO SELLING going on at Sonder right now. None. It’s important to keep your focus on the long run. This too shall pass, and as one of my favorite investors and mentor would say to me, if you’re not in the market when it bottoms, you are most certainly going to miss the recovery. Just like the COVID-19 is NOT a mass extinction event, this market downturn is NOT the end of the financial markets as we know them. Be as unemotionally tied to your investments as possible. Keep your eye on the horizon.
Over the past several months, I’ve prepared my portfolios by moving away from index-based investments to high caliber actively managed funds, because when the economy slows and things get tough, I want talented and experienced managers who will pick and choose quality companies that can weather the storm. I don’t want to ride an index whose constituents may be zombie-companies waiting to die.
I’ve also improved the credit quality of the bonds in my portfolios. Here again, when the economy goes south, lower quality bonds will default in greater numbers. So, while the yields are totally uninspiring in quality bonds, I’m not going to lose my shirt.
Please don’t hesitate to reach out to me directly if you’d like to talk more about your investment portfolio, and how Sonder might help.
Renée N. Duba
This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. The views expressed are those of Sonder Private Wealth and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Investment advisory services are offered through Mutual Advisors, LLC DBA Sonder Private Wealth, a SEC registered investment adviser.