As equity and high yield bond markets decline in the face of a potential global pandemic created by the coronavirus, investors may be faced with the real prospect of a potential dramatic economic event that has already affected China and may be exported to the rest of the globe.
The coronavirus is a human tragedy that has caused thousands of deaths and potentially will cause many more. The economic effects of the virus are realized from both the physical tangible risk and potentially even greater from fear associated with its global spread.
Over the weekend, videos from Beijing (not in the Wuhan district that had been the focal point of the virus) surfaced that showed normally crowded sections of the city virtually empty. Travel to, from, and within China has been dramatically curtailed or eliminated. People with an IQ higher than 30, immediately visualize that potential reality projected over broader Asia (Korea has been affected), Europe (Italy is seeing an outbreak), and potentially the United States are rightfully concerned. Historically, economic paralysis, even if temporary, has not been a productive environment for financial assets
Just last week, the S&P 500 Index set a new all time high. Yet, today, the Dow is down over 1,000 points, with some investors fearful about additional losses if the crisis mounts. Moves this fast typically don't allow time to exit into cash. Which in addition to the defensive posture we have established, is precisely why I advocate for our three mandate strategy which helps to smooth out this type of volatility.
Investing in our strategies could possibly allow you to avoid making the call about whether the fear of an event justifies a portfolio shift. We're doing that already under a systematic methodology that is devoid of subjectivity and behavioral biases.
It's impossible to know what direction the markets will take. An extreme scenario would be that the type of slow-down seen in China comes to the United States and the rest of the world, and lasts not just weeks, but several months. Under this scenario, a significant market reaction may be realized. Should that be the case, our strategies may move to a defensive posture as market turmoil plays out.
On the other end of the continuum, the panic associated with the market may prove to be unjustified. In such an event, the spread of the virus recedes, and the markets may strongly rebound. In that case, our three mandate strategy is designed to attempt to remain in or re-enter markets to attempt to participate in gains.
Regardless of what happens, understand that our strategies were explicitly built to attempt to help investors navigate market turbulence. We'll update you as our posture evolves.
Best,
Michael P. Ernst