In recent days, we have seen a sell off in the global equity markets fueled by the recent spike in new coronavirus, now referred to as COCID-19, cases outside of China.
Today’s market can digest large volumes of information faster than ever before causing significant volatility. During these times we like to step back, survey the landscape and evaluate those things we know about the situation as well as those things we don’t know. Most important, we review closely the positions you own and the level of risk of your overall portfolio in relation to your objectives.
What we know
The corona virus is a previously unidentified virus. It causes respiratory symptoms predominantly in animals but in rare cases it can spread from animals to humans, which is believed to be the cause of the current spread of the virus. As of February 25th the virus has spread to 25 countries and most notably a recently identified case in California which the CDC cannot determine the origin of the contact with the coronavirus at this time.
What we think we know
As with all prognostications, ultimately we may be proven wrong but economists from Deutsche Bank estimate that the coronavirus will reduce China’s GDP rate by about 2%. This would be about double the declined experienced in 2003 with the SARS pandemic. This doubling is predominantly due to China’s economy being much larger than it was in 2003, and having a bigger role in the global economy. In respect to the U.S. economy, economists from Goldman Sachs project the coronavirus will temporarily reduce GDP growth to 1.2% in the 1st quarter, a decrease of 0.03% more than during SARS. However, it is currently believed that growth will return back to its current rate of 2% later this year.
What we know for sure
Over the past 5 days the Dow Jones and the S&P have declined more than 10% from their recent highs, officially putting the indexes into correction territory. Though this is notable given the rate at which the market fell in such a short time span, after the run equities have had over the past 11 years, a market correct is not unexpected. Some of the market decline is warranted, as many corporations warn that they won't meet their first quarter earnings targets. However, much of the continued selloff is due to investor anxiety. Behavioral science has shown that there are social, emotional and cognitive factors that affect out reactions to the market and in turn our investment decisions. We feel losses harder than we do gains, so it is our nature to want to mitigate those losses, even at the expense of future gains. We place more emphasis on recent events and forget to out those events into context. We have attached a graph to give some context to this most recent global event and shed some light on the markets during times of similar crisis. A wholesale sell off of international equities or even equities in general is a short-term reaction. We believe a portfolio should remain globally diversified with quality positions. When opportunities like this arise, there is often an opportunity to allocate some cash that is available within your portfolio or reallocate positions that are determined over-valued to positions that are currently out of favor or under-valued. If this sounds even the least bit familiar to you, then we have done our job in educating and helping you understand our investment philosophy and what most successful investors due in times like these.
Thank you for your trust and confidence.
We will continue to work diligently to identify opportunities in this market environment and to address any concerns you might have as the coronavirus continues its path. Please do not hesitate to contact us with any questions.
We certainly don’t know the extent of the coronavirus at this time but are hopeful it will soon become a mark on this chart for the future.