As February began, most investors were keeping a cautious eye on the coronavirus that was spreading in China. Fast forward just a few weeks and a global pandemic is on our doorstep.
The good news: new cases appear to have considerably slowed in China; a point that underscores that this too will end at some point.
What’s behind the market sell-off? The uncertainty over how badly earnings will be hit by a partial shutdown of the global economy.
As we’ve mentioned before, the stock market despises uncertainty and the capitulation we are experiencing is the manifestation of the market trying to price in the economic impact of a global pandemic.
In addition, alongside the pandemic, an oil price war has developed between Saudi Arabia and Russia putting further downward pressure on the price of oil and the equity markets.
What we don’t know
There are a lot of things we don’t know, including:
- How many more people will become ill?
- What will the total impact on corporate earnings be?
- How low will stocks go?
- When will it all be over?
- Who is hogging all the toilet paper?
However, focusing on what we don’t know and those things out of our control is really what underpins our fears. If there’s one thing that is clear, it’s that people are truly scared, and perhaps they are most scared of running out of toilet paper (sorry, I couldn’t resist).
Fear is a survival mechanism that allowed our ancestors to escape danger, but it can also lead us to make knee jerk reactions we would otherwise not make if were in a calm, clear thinking state.
So instead of focusing on what we don’t know which stokes our fears and leads to poor decision making; let’s focus on what we do know and what we can do.
What we know
As we entered 2020, we were coming off of historically high market valuations and an 11-year bull market. All good things come to an end and a reset was overdue.
We’ve lived with epidemics before, including the measles, polio, SARS, MERS, H1N1, and the flu, which strikes every year and can be deadly. I’m not minimizing the severity of COVID-19, but I take solace in the drop off in China’s rate of new infections because it’s a precursor to what we will experience in the near future.
While we won’t know exact dates until a recession has come and gone, in my opinion it’s likely we will enter a recession if we haven’t already. This isn’t 2008 though, and this recession is much different than the breakdown of our financial system that occurred 12 years ago.
The restricted consumption that’s occurring now will likely continue near term but could very likely snap back along with manufacturing in the second half of the year.
Past pandemics have experienced relatively swift stock market rebounds:
The Federal Reserve has cut rates twice, first on an interim basis on March 3rd by 0.50% and then again by 1.0% on March 15th bringing the rate to 0-.25%. The Federal Reserve also pledged to purchase $500 billion of treasuries and $200 billion of mortgage backed securities in the coming months.
We await more details on a fiscal stimulus response from the federal government which will hopefully alleviate stress on the hardest hit parts of the economy (leisure, hospitality, retail).
Stocks are beginning to look very attractive – especially relative to bonds. As of March 16th:
- The nominal yield on the 30-year Treasury bond is 1.34%.
- The dividend yield on the S&P 500 is 2.65%.
For now, equity markets across the world are undervalued:
What we can control
We can’t control the swift downward move of the markets, but we can control our reaction to it. Each investor should consider the following:
- Understand your near-term liquidity needs and provide yourself with enough safe capital to weather the storm
- Determine an appropriate target amount of risk and position your long-term assets to participate in the recovery
- Rebalance, and
- Take advantage of the pullback by:
- Tax loss harvesting – if you have losses, harvest them for future use
- Gifting – when asset prices are depressed, this is a good time to make intrafamily gifts
- Roth conversions – depressed equities can create an opportunity to move pre-tax retirement monies to after-tax retirement accounts before the upswing takes hold
Don’t lose sight of the bigger picture. Worries over uncertainty drain our most precious resource: happiness. Put a plan in place, turn off the news, get outside for a walk, and find some peace.
Past performance is no guarantee of future results. Rates of return will vary over time, particularly long term investments.
 Broadridge 1/27/20
 Source: Barclays, Bloomberg, FactSet, Standard & Poor’s, U.S. Treasury, J.P. Morgan Asset Management.
 Source: FactSet, FRB, Robert Shiller, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management.
 Source: FactSet, MSCI, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management. *Valuations refer to NTMA P/E for Europe, U.S., Japan and developed markets and P/B for emerging markets.