Coronavirus-Driven Volatility
News over the weekend has brought the Coronavirus to the forefront of investors’ fears, with increased cases outside of China (Italy, Korea) and many other unknowns about how the disease spreads, how it can be cured and what its lasting impact will be. For the first few weeks we knew about the Coronavirus the markets generally shrugged it off, continuing to reach all time-highs. As I write this on Monday morning (Feb 24th), markets closed about 1.5% off their all-time highs on Friday, and pre-markets are trading down between 2.5% and 3% depending on which index you follow.
So where do we go from here as investors? First and foremost, it’s nearly impossible to predict what the impact of this virus will be on our economy, the global economy and the markets overall. What is clear so far though is that it will certainly have an impact – global supply chains of goods in China, slowing down of the 2nd largest economy in the world (China) and a general sense of fear and discomfort which as we’ve seen in the past can have the biggest impact on markets – whether they are legit or not.
It was only a month ago we had our annual State of the Economy presentation. As part of it I used a survey asking what everyone’s biggest concern was for slowing down this bull market. At the time, Coronavirus wasn’t even part of the conversation since China had only voiced concern about it the day before. It reminded me of a blog post I read earlier in the year titled “Risk is What You Don’t See” by Morgan Housel. The biggest takeaway is that oftentimes the biggest risks out there are things you can’t forecast for or reasonably / accurately predict. What’s most important is to be ready for them ahead of time, anticipating that anything is possible even though the timing and accuracy of a prediction is nearly impossible.
How does this concept relate to what we do as asset managers and our clients’ portfolios? In the midst a great market run-up in 2019, we systematically implemented some risk-off trades throughout the year to better align our clients’ portfolios for downside volatility. Towards the end of the first quarter once we recovered the losses from 4th quarter of 2018, we rebalanced the portfolio back to “target allocation” since we were overweight equities. During the year we updated our fixed income allocations to be more interest rate agnostic, knowing full well we couldn’t predict which way rates would go. This has helped greatly as rates continue to drop even in a growing economy. Lastly, we started shifting our equity/stock allocation to be slightly more defensive, making trades towards value and low-volatility holdings. We kept the portfolios at target, but we felt adding some diversification in the equity side of the portfolio would help in case we saw added volatility – which we didn’t anticipate but that we were ready for.
Obviously we didn’t and couldn’t predict what we’re seeing with the Coronavirus fears, but it was important to make shifts to the portfolio even if we were early to the party. As we have and will continue to discuss – what’s most important during these times is to be aware of your overall risk tolerance and stick with a disciplined approach. I will also point you in the direction of our portfolio strategist David Rath’s latest blog post outlining the risks of chasing risk and complexities. It’s a good reminder of investing for the long-term and not overreacting at the wrong times.