What a difference a month can make. In Avoiding the Pitfalls of Performance-Chasing, we contemplated markets at all-time highs. Skies were blue and it seemed like nothing but smooth sailing ahead. Then, all of a sudden in February, the deadly COVID-19 coronavirus burst onto the scene, threatening to wreak havoc on global economies and markets. 1,000-point swings in the Dow Jones have become an almost daily occurrence. Meanwhile, many individuals and businesses are scrambling to protect themselves and their investments from further harm.
In the past few days, we have spoken with clients, economists, and money managers who are all attempting to guess — and “guess” is all anyone can do at this point — the impact on the economy and markets. Here is what we have learned as well as how we are currently approaching the situation from an investment perspective.
COVID-19 has hurt economic activity, disrupting travel, business activity, and supply chains. The yield on the U.S. 10-year Treasury recently dipped below the key number of 1%, which according to bond managers is a recessionary indicator. To combat this, the U.S. Federal Reserve enacted an emergency rate cut on March 3, with further cuts potentially on the horizon.
There is no shortage of economists offering their views on the near-term economic impact, which range from a temporary slowdown to a recession comparable to 2008/09. However, the consensus seems to be that while the virus may trigger a global recession, it is unlikely to result in the type of depression that could have a long-term impact on the global economy. This is based on studies of past outbreaks such as the Spanish flu. Ultimately, the economic toll will depend on the severity and spread of the virus, of which no one can be certain at this time.
In February, stocks suffered their biggest weekly losses since 2008, with major U.S. stock indices making headlines for their dizzying declines. However, as of the time of this writing on March 5, the S&P 500 is down around 6.9% for the year despite the virus-related pullback. The large swings in both directions appear to be the result of investors weighing both known and unknown risk factors in a rapidly-unfolding situation.
Bond markets have also reacted strongly, with the U.S. 10-year yield touching its all-time low and causing notable bond manager Jeffrey Gundlach to quip, “Treasury bonds are not really a place to make money anymore, they are a place to not lose money.” Globally, investors have become more and more content with just not losing money, as they bid up these assets despite near-zero (and in some cases negative) yields. Bond prices go up as yields go down, meaning that fixed income has been a safe haven during the recent bout of market volatility.
In light of these unnerving developments, what are we recommending for our clients? A core principle that is especially helpful in times like these is diversification. If you own a diversified portfolio of stocks, bonds, and alternative investments, your losses will likely be smaller than the eye-popping numbers on the TV screen when the stock market plunges.
Another key principle is to have a long-term view. Rather than panicking and selling out of risk assets, in general, it is wise to “be greedy when others are fearful,” as investing sage Warren Buffet advised. As of this writing, the CNN Fear & Greed Index, which tracks the emotions driving the market, was at 9 out of 100, indicating extreme fear. As we noted, the consensus view is that at some point the global economy will recover from the impacts of the virus. If so, taking the measured approach of rebalancing into cheaper assets can have a positive impact on long-term returns.
It may be impossible to completely immunize your portfolio from the effects of COVID-19. However, adhering to the time-tested principles of diversification and taking a long-term view can help your portfolio’s chances of surviving and ultimately thriving regardless of what turn the market takes next.
This article was written by Matthew Lui, CFA, CAIA, Vice President, Investment Research. As a member of Canterbury’s Research Group, Mr. Lui is responsible for sourcing, evaluating, and monitoring traditional, long-only equity managers. Mr. Lui serves as the chair of Canterbury's Global Equity Manager Research Committee and the vice chair of the Hedge Funds Committee. He also sits on the Capital Markets Committee. Prior to joining Canterbury, Mr. Lui was a trader and research analyst at Knightsbridge Asset Management. He received his Bachelor of Arts in economics from University of California, Berkeley. Mr. Lui is a CFA® charterholder and a Chartered Alternative Investment Analyst.