The financial markets continue with their process of sorting through all the data about the coronavirus, its impact on consumers, companies, and the overall economy. Right now, the world is feeling pretty bad. Investors are opting to get out more than to get in. This does make some sense given what’s happening currently. The virus has impacted the economy in very profound ways, and some industries are quickly becoming impaired.
For investors, it does make sense to reduce risk in some areas, but not so much in other areas. This is the process that is being sorted out each day in the markets. We have been making these decisions as well, and we are reducing risk in areas we think will be more severely impacted by the virus. Areas like restaurants, retail, consumer discretionary (non-essential, big-ticket purchases), energy, travel, and some cyclical manufacturing.
Other areas will likely be fine but are being caught up in the overall selling. We are assessing which areas are likely to be truly impaired and which are just experiencing a glancing blow.
While all this volatility is no doubt concerning, we also have to go back to the basics and make decisions from a rational perspective. To be an investor, you need a fundamental faith that the system is resilient, it does recover, and we do go on to future growth and profitability. Where does that fundamental belief come from? It comes from the fact that we have recovered from every other crisis, and there is no reason to believe we will not eventually recover from this. Without that fundamental perspective on longer term outcomes, there is no way to deal with these periodic crisis. If you don’t have that basic confidence, you’ll be selling everything each time you hit one, and we now have had three in the last 20 years.
The rational approach is as follows:
- Accept that these financial crises occur,
- Plan for them before they happen,
- When they do happen, make risk management decisions to deal with the problems, and then
- Invest with an eye toward an eventual recovery.
That’s how we are approaching things. There are real problems in certain areas, and we are reducing risk there. Eventually, however, the world and the global economy will get beyond this. But the real question for investors is how long?
If we take the 30,000 foot perspective, it seems like a vaccine is something our medical community can develop, and from reports, it’s probably two years out. If we are going to bookend this crisis, looking at a two year period is probably as good a start as any in terms of assessing risk. Yet, it’s likely the market will bottom and start a recovery well before the actual end of the virus issue. Just like the market has fallen faster than the actual economy at the start of this, it will likely start to recover before the actual economy does, as investors are forward looking. If they can see a path out, money will flow back into stocks because there will be money to be made coming out of this.
We know these are unsettling times to say the least. We are implementing our portfolio strategy to manage both the need to grow and protect portfolios.