10 Q/A Markets and Virus

The world seems a little uncertain nowadays, would you agree? The world is focused on the uncertainty related to the disease outbreak spreading throughout the world. 

We invest on the assumption of risk emerging. That’s why we diversify and invest as we have. We have already made several adjustments prior to the drawdown and we are looking to adjust more as we push through this correction. We watch headlines, adjust as needed, and are always asking what we need to do to better position portfolios.

It’s not time to panic. The economy is still basically healthy. But questions regarding this issue are understandable. Here are questions I have most recently been asked as well as in the media.

1. How bad is the virus condition going to get?

It's anyone’s guess. I'm not a medical expert and certainly no one can predict the future of any outbreak. It's clear that we are contending with a highly infectious disease and it remains to be seen how widespread the outbreak will be.

2. Why are markets going down?

Investors hate uncertainty and anxiety tends to cause people to panic and sell. We have seen this countless times and this situation is no different. We expect volatility to continue until we have more certainty about what the situation looks like on a global basis.

3. What's happening in China right now?

Much of the country is in lockdown mode, but it is beginning to return to somewhat normal conditions. Companies are beginning to reopen, manufacturing is restarting, and retail outlets are once again beginning to serve customers. Starbucks today announced that they would be reopening all of their stores and Apple has reopened a vast majority of their retail outlets. Still, tens of millions of people still remain in lockdown inside their home and we expect that to continue for the unseeable future. We believe China’s GDP is going to be hugely impacted.

4. How does this affect investment strategy?

Any portfolio strategy will be impacted by a market downturn, but we have proactively positioned our strategies to avoid excessive weights in international markets. We continue to focus on investing in companies with solid, predictable earnings. Many of the companies we invest in pay dividends as well and that helps with market volatility. In the long-term, we think the virus outbreak will not have significant long-lasting affects despite the short-term volatility.

5. Should I sell everything?

Markets will be volatile and there's nothing to stop the market from bouncing back when news is positive. Remember trying to rationally guess when markets will fall is based on an irrational belief that markets are logical and predictable. What is most logical and predictable is buying companies that have great cash flow and likely good long-term profits. We think this type of fundamental analysis makes the most sense and works best.

6. What about fixed income? How is that doing?

Bonds generally have been positively impacted by the downturn. Investors are flocking to fixed income and values in bond assets have been positively impacted. That is why bonds help in strategies; they provide diversification and risk mitigation. Bond values have increased.

7. How much will the market drop in the future?

Hard to say. While the market rally has been strong, it has not been surprising to us that uncertainty has caused investors to panic short-term. I would be quite surprised if the market continued to move downward on a sustained basis, but it is hard to definitively predict. The economy is basically doing okay although it will likely grow less based on a slowdown in GDP from this virus. For that reason, panic we think is not a reasonable response.

8. Will this impact GDP growth?

Undoubtedly. We believe it will not only impact US GDP growth but will also impact global GDP. When GDP is reduced, companies’ earnings tend to be reduced and when that occurs, stocks come under pressure. That's what you're seeing now. This is not to say that the GDP downturn will be long-lasting; we don't expect that. But we do expect that there will be some minor impact on GDP growth and that you will see that in stock market prices.

9. Is it a buying opportunity?

I do think it is a buying opportunity if one has cash or is looking to move into equity if you have a longer-term perspective. This is not to say that this is a market bottom but is certainly a discount compared to two weeks ago. Stepping in to buy assets hit with an overreaction based on scary news is a reasonable strategy.

10. So how should I look at this downturn?

Look at it as essentially as an earnings miss for the entire world. What I mean is this. When a company misses earnings, but still has great long-term prospects, what happens to that stock? Typically for short periods of time the stock goes down and often bounces back later when it is clear that long-term prospects remain positive for that equity asset. I think that's how you should look at the downturn that we're seeing now.

11. Bonus Question: Should I panic? Is the world going to implode based on the outbreak news? Will the US and global economy crash because of this?

NO
NO
NO

I know this is scary.  Downturns are always painful. If you would like to discuss this or any other issue, please let us know. We are here and adjusting as needed.