Jay Flower, CFP® Dear Clients and Friends,
We know this past week has been concerning for all investors so we wanted to communicate with you as quickly and efficiently as possible what our thoughts are about the recent market declines. The well-documented spread of the coronavirus (COVID- 19) outside of China has triggered widespread selling across the global equity markets. Equity markets hate uncertainty and right now we believe the markets are reacting to what the economic effects of the outbreak could be in the event containment is not achieved quickly. As of this writing we are officially in a correction as the S&P 500 is down more than 10% from the most recent high and stocks are on track for the biggest weekly decline since 2008.
We don’t know how long it will take for the coronavirus to be contained much less what the impact will be on the global economy. At this point we believe taking meaningful portfolio action is the epitome of speculation (and market timing) and that is not how we manage portfolios for clients. When constructing portfolios and determining the proper asset allocation we consider each client’s risk tolerance and time frame but have also advocated having at least 3-5 years of spending allocated to cash and short term bonds as insurance against periods of volatility such as this. Having this liquidity available allows one to take the long view and not be forced into selling high quality stocks at depressed values.
Coming into 2020 the market anticipated a continuation of the global economic recovery and growing corporate earnings. The coronavirus is a real live disruption to both. The US manufacturing and services PMI data has already declined to levels that indicate future economic contraction and companies are beginning to report the deleterious effects of the slowdown. For instance, Mastercard, a global credit card network with a firm pulse on global economic activity, reduced its 2020 sales guidance. Disney has had to close Shanghai Disneyland and Hong Kong Disneyland until further notice. In response to these early signals of economic disruption it is likely we will see a coordinated effort by central banks to help stabilize the markets and to support economic activity while the spread of the virus is contained.
We don’t want to downplay the potential for the coronavirus to drive further market declines, but we want to make informed and rational portfolio decisions based on data and to avoid being reactive. Historically, this level of selling pressure is seen around market bottoms. The equity market acts as a leading indicator; so we would not be surprised to see a market rally even if the coronavirus continues to spread. Our research team is working diligently on the matter, including speaking with epidemiologists to better understand the virus as well as the containment process. We are still in the early stages of this outbreak and the path of this virus is anybody’s guess at this point, but just like every other crisis in market history, for the long-term investor it pays to be opportunistic when others are fearful. Our asset allocation policy of reserving 3-5 years of liquidity allows our clients to play offense in exactly this type of environment. With the benefit of hindsight, we believe this crisis will be viewed as a long-term buying opportunity.
We hope this helps put this very unsettling week into a little better perspective for now. As always, please reach out to us to discuss things in more detail.
Sincerely,
Your HM Payson Team
