The outbreak of the coronavirus is gripping the world. It has infected more than 80,000, has killed more than 2,700 and is directly impacting the daily lives of millions of people. It simply is the top headline around the globe. The potential future effects of the virus sent shockwaves through the financial markets this week, with stocks falling several percentage points in a matter of days. We feel it’s important to address this number one topic and the potential impacts to your portfolio.
As of the writing of this piece, we know that the coronavirus has spread to multiple countries, with a rapid increase in cases in the last few days in South Korea and Italy. The number of new cases is thankfully declining in China, but the concern of a worldwide contagion is rising. Domestically, the Centers for Disease Control and Prevention (CDC), the National Institutes of Health (NIH), and other agencies have issued warnings of a likely spread of the virus in the United States.
Extreme efforts are being made to develop a vaccine for the virus, and the good news is that early stage advancements are progressing much faster than seen in prior health outbreaks. While it is early to hypothesize, some medical companies and agencies are now hoping for a vaccine by April of 2020. This would be a much faster turnaround than ever seen before. However, it still leaves a minimum of several more weeks to months of combatting the virus on a global scale.
As of current, China, South Korea and Italy are taking extreme measures to limit the potential spread of the virus. Millions of people are being ordered to stay at home. This is in addition to quarantines for already infected individuals, and extensive travel bans to limit the potential spread of the virus.
The resulting effect of important precautionary efforts is that life and business as normal is grinding to a halt, particularly in China, the world’s second largest economy. Stores are closed, factories are dormant, schools aren’t open. Life has become a ghost town for millions.
The world is starting to feel the ripple effects. Companies, big and small, are experiencing supply chain disruptions as so many products and parts are sourced from China. A plethora of companies have already issued guidance that the coronavirus effects will negatively impact revenues and earnings. On a broader scale, the virus will inevitably contract GDP growth, both domestically and abroad.
What’s rather disconcerting is the fact that the coronavirus has an extremely long incubation period of two or more weeks. This means that even if cases begin to decline, we’re likely looking at several weeks to a month (at a minimum) before social, business and school bans are lifted.
The markets have awakened to the current and potential impacts of the virus. Business and economic growth potential for at least the first quarter or half of 2020 is distinctly stunted, even in the best of scenarios for the virus.
Coronavirus Impact On Your Investments
While we would like to be optimistic about the curbing of new cases in China and the potential for a fast turnaround vaccine, we feel it’s important to recognize the risks of the virus on an immediate basis, as well as recent warnings from the CDC and NIH. The spread of the virus could get worse before it gets better. Bottom line, we wouldn’t be surprised to see a greater selloff in stock markets, at least in the short-term.
Should You Sell Now?
We never advise selling into a fast-moving downward market, unless you need to secure liquidity for cash needs in the next few years. Hence, this is an important time for everyone to carefully evaluate cash needs on the horizon. If you envision cash needs over the next five years to exceed what you have in cash and high-quality bonds, it might be prudent to reduce stock and risk exposure.
As a matter of discipline, we always advise clients to hold a minimum of five years of liquidity needs in cash and bonds. This magnitude of preservation-oriented assets provides an extended “runway” of cash flow funding if and when things get rocky in the stock markets. Knowing that you have several years of cash needs in preservation-oriented assets allows you to sleep well at night.
In an ideal world, holding more than five years of cash needs can create a buying opportunity. We’re firm believers of taking profits when stocks are high and buying stocks when they’re low. If you have excess holdings in bonds (above and beyond your cash needs) you can feel comfortable buying stocks when they decline, without infringing upon your personal financial security.
Are We Reacting?
Generally, the answer is no. Our adherence to a disciplined investment approach has guided clients to hold ample reserves in cash and bonds. We’re also happy that we’ve trimmed back stocks as they’ve swelled in recent years. Rather than selling into a down market, we will be focusing on potentially buying, if further substantial market declines ensue.
Ultimately, we do see a likely resurgence in stocks once we hit a positive inflection point in the coronavirus. In fact, such a resurgence could be rather significant in terms of filling backlogged orders and quenching pent up demand from millions of people over a period of months. Our focus will be on trying to capture buying opportunities in what is inevitably a difficult to navigate path from health, social, family and financial perspectives.
The coronavirus is a prime example of why a disciplined investment approach, as opposed to trying to time the markets, ultimately pays off. No one could have predicted the coronavirus a few months back. No stock charts, fundamental analysis, or quantitative statistics could have predicted the current health, world, economic and financial situation. If nothing else, the current environment is an important investment lesson learned. While stocks soar in more years than not, market downturns inevitably ensue. Some can be predicted, while many cannot.
As always, we encourage you to contact us with any questions about your portfolio, and certainly if you have any concerns about your future liquidity needs. We always want to be responsive to your personal and investment objectives.
Separately, we wish everyone a healthy and steady path forward, and encourage you to take precautions if traveling, particularly abroad.