When I wrote my Special blog post, Rally, Disrupted, on Monday describing the market events emanating from the coronavirus outbreak, no one had any idea that the market psychology would balloon into a full-grown panic. The idea of “sell first, ask questions later” took hold.
Punctuating this thought, the World Health Organization Director-General Adhanom Ghebreyesus was quoted in the media today saying “Global markets should calm down and try to see the reality. We need to continue to be rational”. Also saying, “Based on the facts on the ground, containment is possible, but the window of opportunity for containment is narrowing. So, we need to prepare side-by-side for a pandemic”.
Of course, no one knows how this situation will play out. Containment consistent with the SARS and other outbreaks would bring things back to normalcy relatively quickly; whereas, unknown dire consequences are being priced into the markets.
U.S. equity markets sold off from all-time highs only a week ago being down -12% from that high and down -8% for the month of February. Other markets followed suit, as well, with emerging markets down -8% and international developed equities down -7%. Offsetting these losses in the capital markets were core bonds and investment grade corporate bonds both up about 2% that acted as a flight to quality. Moderate risk balanced portfolios of stocks and bonds were down about 5% during the month of February.
Outlooks from investment thought leaders gives some perspective to the situation and only a few are recommending selling. Jeremy Siegel, noted investor and academic from University of Pennsylvania, was on CNBC a few times during the week and continued to feel that though we are suffering short-term losses, a long-term investor will be rewarded by sitting tight. Arguably, if you are not a long term investor you should not have an undiversified position in risky equities in any event. Also, most of the tactical managers that I follow (i.e., the managers who have models to get in and out of the markets) were still “risk on” through Friday night. That includes Beaumont Capital and Julex (my previous firm that I co-founded).
So, it is really two questions: when (if?) to get out and when to get back in.
For a long term investor, I currently believe staying the course is a prudent approach. I think there is a strong risk of getting the sell (and buyback) decision wrong. This would be the classic “whipsaw” effect where you sell and buy at exactly the worst times as the trends move against you. I have kept all client positions intact thus far. I expect if we start seeing some demonstrated fundamental (and technical) economic and capital market statistics pointing to a further large market drawdown (such as diminished industrial PMI, depressed earnings, pronounced negative price momentum, etc.) that could develop into something akin to the Great Recession, I will take everyone to a less risky profile. The environment is not there yet.
Lastly, in order to avoid having misinformation cause you undue stress, the most reliable source for information right now is from the Centers for Disease Control and prevention (CDC) that can be accessed at https://www.cdc.gov/coronavirus/2019-nCoV/index.html. I will be following this developing story very closely and will post frequently as appropriate.