For several weeks at the beginning of the year, we were expecting that the strong markets would experience a pullback; but what happened was that world stock and bond markets suddenly became unstable over the last 12 trading days. We began to prepare for a pullback in January, increasing cash balances, adding gold, and when the virus was first becoming news, we made sure to cut exposure to the sectors, industries, and companies we judged most vulnerable to the virus outbreak (travel, leisure, restaurants, emerging markets, and the like). Sharp declines and sharp rallies will likely persist until the headlines surrounding the virus’ spread become old news, and until then we plan to reduce exposure on the rallies.
If the optimists in the public health community are correct, we will be seeing a moderation of coronavirus infections once the weather warms up. This may moderate the effect of fear impinging on the market.
On the positive side, we are seeing more and more government action to cut interest rates, provide liquidity to markets, and support housing, infrastructure spending, and small business. Already these policies have been advanced in the United States, Australia, China, Japan, and the UK along with several other countries, as noted above.
More and more countries will implement these policies and more and more rallies will take place in the U.S. and world stock markets as a result. This will lead to an unusually volatile stock market for the next few months.
In the big picture though, we believe that this is not the end of the world; it is the beginning of an opportunity. The critical factor is that fear about the virus needs to begin to dissipate. Though it may intensify in the U.S. and in other developed markets in the short term, we believe that eventually the virus’ spread will decline, as we have seen in South Korea and other countries. When fear dissipates, and market participants again pay attention to the economic fundamentals and the strength of the stimulus that the crisis has unleashed, sentiment may rise as rapidly as it has been falling.
Whether this turns into a sharp deceleration or just another economic scare remains to be seen. The events of the next few months will tell us. This is not an easy time for investors, and we believe that having cash and increasing cash balances in portfolios is a constructive way to protect our clients’ capital.
Thanks for listening; we welcome your calls and questions.
