Coronavirus: Our Plan - Our Thoughts
“ What is the plan?” That is a question we are now hearing from our clients.
Our philosophy to create a personalized financial plan and asset allocation strategy that meets your needs and goals remains in tact. For most clients, these goals or needs have not changed - so largely, asset allocations are not going to be abandoned during this pullback.
However, we are reviewing all of our accounts and making adjustments where we can to increase income/dividend yields for those in an income focused portfolio, putting cash to work where we can, and replacing some of our holdings, that may now show a loss, with lower cost investment options (i.e. selling Growth Fund and buying a Growth ETF).
We know that watching 24/7 news coverage that focuses highly on the negative can create anxiety and uncertainty. We understand the emotional impact this is having on our clients and wanted to share our thoughts on the markets right now.
As always, please feel to call us with questions or comments. We are limiting in person meetings for the next week. We do have the ability to host a WebEx meeting (online) if needed.
Our Thoughts on the Market and Economy
The global stock markets entered a period of panic selling over the past two weeks. We have never seen a correction of this magnitude happen so quickly with such violent price swings. While the broader market is down about -20% as measured by the S&P 500, many companies are now trading at 30%-40% discounts to where they were just a month ago. The culprit is the coronavirus, and the emotion of fear that has coupled this virus. We wonder if the pandemic is more a pandemic of fear than virus. While the virus is growing and surely precautions must be taken, we believe the media coverage of this is disingenuous in many cases. The other night ABC reported that the death toll from the virus had “soared” in Italy, with 123 people passing away from complications from the Coronovirus-this is in a country with a population of 60 million. Most of the victims were older with prior medical conditions. Death rates are estimated to be at 1% from the virus, which means 99% of the people who contract it live!
Financial and Market implications: There is no doubt that global growth rates will contract over the next few quarters. The industries hit hardest include Airlines, Hotels, Cruise lines ,restaurants, online booking sites, destination resorts, and energy. There is of course, a spillover to other industries including industrial production as supply chains and travel restrictions are hampering global trade. It is not unreasonable to expect that we will see a self- imposed quarantine for the next few months globally. Most experts believe that warmer weather may aid greatly in killing off the virus. In addition, There is a big rush for cures and vaccination at drug companies globally.
With lower expected growth rates globally, companies will very likely report earnings below the estimates they had at the beginning of the year due to the contraction of economic activity. However, there are some real longer term positives from an investment and consumption standpoint that the press is not likely to share with you. These include:
*Significantly lower prices for gas and energy which acts as a tax cut for the consumer
*Significantly lower interest rates which is leading to record refinancing and thereby increasing cash flow to the consumer-70% of the economic growth is driven by consumer spending
*Lower stock prices- which allows new money coming into the market to purchase companies at much more attractive prices than we saw just two months ago-the market is now trading near it’s historic average price earnings multiple (P/E ratio)
*Higher dividend yields for investors as falling stock prices increase the dividend yield-with the ten year treasury yielding under 1%, a 3% dividend yield is attractive even without price appreciation.
*a reduction of the excesses of speculation and higher debt levels associated with hedge funds and institutional money flows in the stock market
*Fiscal and monetary stimulus by central governments will be put in place to gap the pains of the temporary economic slowdown
And Yes, this too shall pass….the pandemic of the virus will eventually pass and yes, confidence will most likely be restored in the global economies. Is this a repeat of 2008? We don’t think so. Are we at a bottom? No one knows the answer, but we we believe this higher level of volatility may stay with us for a month or so as nations across the globe take steps to slow down the spread of the virus. For a forward looking investor, averaging into the market is the most prudent way to build your stock allocation.
What should investors do now?
Stay positive, the history of pandemics show that these periods have historically been great times to add to stocks. Stay the course as your longer term financial goals will not be served with a flight to safety in lower yielding bonds and cash accounts.
As Warren Buffett loves to quote, “Be fearful when others are greedy, and greedy when others are fearful.” It is quite likely, that when we look back in a few years at the today’s panic selling in the global stock markets, we would reflect and say what a good opportunity that was to add to stocks.