Coronavirus and your Portfolio

Written by: Philip Lockwood

How big of an impact could it have on your portfolio (Posted to Blog and Facebook on 2/24/20)

As of Feb 19, 2020, we are up to 75,000 confirmed cases with over 2,000 deaths according to the most recent figures from the World Health Organization.  A group was recently removed from a cruise ship and sent to Omaha, Nebraska. The virus certainly has the potential to limit growth of companies specifically those that do business in China. Based on the closure of many businesses in China that alone may influence the numbers for these companies. Whether it is Apple doing business in China who released a modification to their growth projections today (2/18/20) or General Motors who sells more cars in China than they do in the United States. We can assume there will be an economic impact of coronavirus on global GDP. Time will tell how severe this virus is and how long this virus will be going around. There are many variables to consider when discussing this global impact on your portfolio. Many of the larger publicly traded companies have already updated their guidance with the expectation of negative effects of the coronavirus. One difficult part is figuring out how forthcoming China has been with their numbers of reported cases, casualties, etc. One thing I am doing as a financial advisor is monitoring portfolio’s for companies that do much of their business in China and monitoring the impact that the virus may have on their quarterly numbers. The other option is to lessen or eliminate geographical risk by owning companies that do not have exposure to China and thus would have a limited impact. Many of the media pundits are comparing coronavirus to SARS when in reality coronavirus has spread much faster than SARS ever did.

*Source: Guggenheim investments, China National health Commission, Wind. Data as of 2.12.2020

The already-terrible human impact of the virus has the potential to become more tragic, but the economic impact will be significant even if its progress can be impeded. The impact on corporate profits and free cash flow cannot be overlooked. The effect on oil and energy prices could turn out to be more extreme. We already have excess oil production in the world. As demand dries up from the virus repercussions, oil could see a significant plunge unless OPEC or other producers decide to cut production. Scott Minerd, the CIO of Guggenheim Investments, had a salient point about equity and bond prices: “Yet as a major economic problem looms on the horizon, the cognitive disconnect between current asset prices and reality feels like the market equivalent of “peace for our time.” The average BBB bond yields just 2.9 percent. A recent 10-year BB-rated healthcare bond came to market at 3.5 percent and subsequently was increased in size from $1 billion to $1.7 billion due to excess demand.

For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance. It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side.”

Part 2 (Written and posted on Blog and Facebook on 2/28/20)

With todays 4% drop, the U.S. stock market has now fallen 12% in a week, wiping out all of this year’s gains and taking us back to levels of last autumn. It is not only the amount – 12% – that we’re feeling, it is also the velocity of the fall. According to data from The Wall Street Journal, this week’s 11%+ drop from all-time highs occurred over the fewest days of any correction of the past four decades.

https://www.wsj.com/articles/global-stocks-extend-declines-as-coronavirus-concerns-mount-11582784087

If we look at the largest 4-Day Dow Percentage Losses since 1990

CNBC – Squawk Box 2-28 5 a.m. central

In 1998 we had the collapse in the massive hedge fund (Long Term Capital) and the Russian Financial Crisis – 2001 We had the Terror Attacks – 2008 We had the Financial Crisis (Lehman Collapse) and today we had the Corona Virus collapse. The point to make about all of these is that in virtually every instance we had some sort of firewall, there was a piece of news that provided confidence back in the market. The thing I am looking for is what that piece of news is that changes this direction of the market. This market has discounted a lot already and it is driven by the headlines. I would guess we will continue to have some additional scary headlines related to this virus in the United States but at some point, we will get the one “headline” that changes everything.  This to will pass.

The good news about a panic driven correction is that an emotional response may be temporary, I would be more fearful of a slower decline based on tumbling market fundamentals and over leverage, which is not the case so far. If we look at the past few recessions, Subprime mortgage crisis, Financial Crisis and Dot-Com bubble, the main cause of the recession has been over leverage. We have seen many companies revise their 2020 earnings significantly lower as companies are running into global closings due to the coronavirus and as a result those closures will reduce sales and hurt their 2020 outlook.

The news about the coronavirus driving the sell-off is fluid and developing. There is much we don’t know about the virus itself and how it spreads, but we do know that many companies have said that it will cause near-term disruptions and slowdowns. The CDC warned that the virus is likely to spread to the U.S. And today’s news of a serious case of coronavirus in California without a tie to an existing outbreak was enough to push stocks down almost 3%. Goldman Sachs strategist David Kostin wrote “Our reduced profit forecasts reflect the severe decline in Chinese economic activity in the first three months of 2020, lower end-demand for U.S. exporters, disruption to the supply chain for many U.S. firms, a slowdown in U.S. economic activity, and elevated business uncertainty.”

With this much uncertainty in the air, driven by headlines, stories, and our own fast-spreading fears, stocks are showing some wariness, especially coming off a booming 2019.

We’re long-term investors, so we focus on just that: the long term. That means more than just a quarter or even a year. It means many years.

But I am not an ostrich either, putting my head in the sand while the rest of the world goes on around me. Fidelity clients, whom I have discretionary trading ability, may have noticed I took the opportunity on Friday (2/21) and Monday (2/24) to sell some of the stocks that I thought had valuations that were out of line with our initial purchase and purpose, some stocks had grown significantly and we were able to lock in gains. Others had more of a global influence on earnings that I was no longer comfortable with for some of your portfolios. Either way we took a larger than normal cash position which ended up coming in helpful on the days that followed. This move to cash was a slight change to the flight plan, but I will be looking at ways to redeploy the cash with investments that make sense for your individual portfolios once some of the uncertainty around the coronavirus is lifted. I believe there will be an opportunity to buy stocks that are “on sale” due to an emotional over reaction.

Like any pandemic, the coronavirus is serious. We need to take it seriously, but as you are reading the news headlines and planning on making decisions, keep these in mind.

Stocks are volatile in the short term, but over the long term, returns are far more positive than negative.

To revisit my year end client article, I wrote in January – It is remarkable when we look at the last 50 years (1970-2019) to think the split between “up” and “down” trading days for the S&P 500 is 53% up and 47% down. This encompassing a total of 12,613 trading days, even with all of those days and an overall deviation of only 6% between positive and negative days. (source: https://www.crestmontresearch.com/docs/Stock-Yo-Yo.pdf)

The total return of the S&P 500 over the last decade was a gain of 13.6% per year (total return). If you missed the 10 best percentage gain days over the last 10 years (10 days total, not 10 days a year) the 13.6% annual gain drops over 29% to an annual gain of 9.2% (source:BTN Research)

Historically speaking, stocks go up. Over years, not always quarters.

Yet stocks do indeed fall — sometimes dramatically — but they historically recover.

Looking at past data, corrections like this happen once every 12 to 18 months or so and last four to six months. It’s been more than a year since the last correction, so we’re not shocked to see one. In fact, we’re kind of on schedule.

The silver lining is that corrections tend to snap back within about four months, according to Goldman Sachs data. Furthermore, keep in mind that over time, stocks spend *3 times as many days rallying compared to days it’s spent in correction (-10%+). With the exception of our current correction, all 29 previous corrections of at least 10% over the past 50 years have been completely erased by a market rally. We just need to get through the down days to make sure we experience the ups. * https://www.fool.com/investing/2018/03/27/50-years-of-stock-market-corrections-and-the-1-fig.aspx

My uncle used to say to me that cash never goes out of style. That’s especially true in nervous markets. So, keep some cash handy to put to work in stocks when they go on sale.

No one has a crystal ball to say stocks won’t go down another 10% from here by midyear. They very well could — or they could rally. What’s important is that you both understand the market volatility potential and commit to investing through it.

It takes courage to hold on and keep investing in turbulent markets. I’m here to help you find and maintain that courage.

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Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.