Commentary on Coronavirus
by Tom Kelly -
February 27, 2020
This past week has been a difficult week from a headline news perspective. We realize the coverage of the Coronavirus has been disconcerting both from an economic perspective but also from a human point of view. We all hate uncertainty.
Leading up to Last Friday economically sensitive themes and sectors have clearly been leading the market since August. Economic data has been beating expectations and corporations have been reporting better earnings than analyst estimates. Central banks have been active in providing stimulus and have been signaling a willingness to continue to support the economic expansion. Reports on consumer confidence have continued to improve, wage growth has been accelerating and new home sales robust. The backdrop coming into the last week was very positive.
What has happened?
Over the past several days, markets have been jolted by concern around the spread of Coronavirus. News driven fears of the unknown or uncertainty have driven a sharp pullback in market prices as investors have tried to assess the near-term economic impacts. To be clear, markets dislike uncertainty more than anything. We are fortunate to have moved to a more defensive stance over the course of the last year as markets were pushing higher.
We know from previous disease outbreaks such as SARs, MERs, Ebola and Swine Flus that in those cases, markets stabilized quickly and went on to make substantial new highs.
Corrections are a natural characteristic of markets. One of the most attractive characteristics of markets is that they offer daily liquidity, but this can also be a curse. The exit sign burns brightly which may lead to knee jerk reactions.
We would all love to see the future and know how the markets will react when news hits…but that is not the way things work. Stocks have been discounted quickly on uncertainty but will recover as the situation begins to become clearer. They will recover well before there is an all clear signal as we have seen so far in China.
What are we doing?
As we go forward, we will continue to monitor the developments and their impacts on the economy and markets. The risk of becoming too cautious is whipsaw. Prices will rise quickly on any positive developments and sitting entirely in cash or on the sidelines can be just as costly as the initial declines.
Technically speaking, this week we have seen quantitatively, capitulatory action seen only at other major markets lows including October 19, the bottom of the 1987 crash. None of these times were times to sell everything and go to the sidelines.
Going forward, we will continue to follow our step by step process based on evidence and not emotion.
We will update you with further developments. Please don’t hesitate to call us with questions.