To this point, 2020 has been an unsettling year: investment markets were initially up significantly, but COVID-19 fears over the past two or three weeks have caused them to give back those gains. We’re pleased that our risk management strategies — specifically our put options — have significantly reduced the impact of this volatility. However, as more information comes out about the coronavirus, there is growing concern that we may be in uncharted territory.
Ray Dalio (Bridgewater Assoc) identified three separate but related issues that help provide perspective:
- The Virus: – The spread of COVID-19 is being treated as a global health crisis. How it is handled, and the resulting consequences, will vary by country. Headlines regarding the number of people infected and the number of deaths will continue. The uncertainties surrounding a new virus are frightening, and yet we may ultimately learn that this virus produces fewer infections and deaths than the flu does annually. A vaccine will be developed. The heightened concern about the virus has come, and it will go.
- The Economic Impact: Countries are taking significant action to contain the virus. Those actions that curtail business activities (including social distancing) will certainly reduce revenues for many companies. The result will very likely be a short-term economic decline. Some industries like airlines and tourism will be hurt, and others will benefit from lower interest rates or cheaper oil. Some countries will likely be pushed into a recession. While deaths resulting from the virus are upsetting, history shows that most issues like this have resulted in bigger emotional reactions than sustained economic and market downturns.
- The Markets: Central banks and governments have already begun to provide both monetary and fiscal stimulus. Ultimately, business activity will improve leading to a rebound for many companies. Of course, it is unclear whether that will take days, weeks or months.
With the drop in the markets, there are now many good companies with attractive yields and strong growth prospects. Normally we would take this opportunity to buy equities, but given the uncertainty in the immediate future, we feel the prudent move is to de-risk our model portfolios until the full economic impact is clearer. We have moved about 20 percent of our QW Elevate Enhanced Global Equity Pool to bonds.
Investing in good companies for the long run has historically provided investors with strong returns. Most of the time, we want the equity portion of our portfolios to be fully invested. But for now, we believe it’s a time to protect capital. We’ll continuously watch for the opportunity to move back to being more fully invested.
We will get past this. Forecasters usually underestimate human resilience and the bounce back tends to come earlier and more strongly than expected.