This Time is Different – Just Like All of the Other Times
“This time is different” – is the typical investor sentiment when one is in the middle of the volatile market swings that result from exogenous shocks to the world equity markets. And while each episode does indeed have their own unique characteristics, they share similar traits regarding their outcomes. Broadly speaking, exogenous shocks from previous viral outbreaks go through phases of discovery, uncertainty and reaction to that uncertainty. This is followed by increasing clarity of the situation leading to a decreasing level of uncertainty and finally the market’s reaction to this decreased uncertainty.
As the chart below indicates, disruptions from viral outbreaks are a bit more frequent than one may realize. The resiliency of the global markets’ ability to recover is evident.
Maybe this one feels a little different to us because many of the most recent outbreaks have taken place far from U.S. shores. In the U.S., where 70% of the economy is based on consumer spending, we are uniquely positioned to rapidly recover from this outbreak. Once testing is more widespread and the affirmation of new cases peaks and begins to decline (as it already has done in China) there is nothing to indicate that consumer demand for goods and services will be permanently impaired in this country. Indeed, as we write this letter Congress is proposing a package of emergency measures that are an attempt to mute economic impacts of this outbreak.
The Other 1%
After a period of initial complacency, in the last 24 hours the societal response to the COVID-19 outbreak in the U.S. has been swift; from the postponement of all of the major professional sports leagues on a national level and the cancelling of the NCAA basketball tournament to the closing of universities and college campuses across the country. Locally, we’ve begun to see the closure of school districts in towns along the shoreline and across the state. We view this with a sense of both awe and pride. We are learning that advanced age and the accompanying likelihood of underlying medical conditions make one more vulnerable to this virus’ effects.
Given this, we view these attempts to slow the spread of the virus as a potential compassionate over-reaction and the only morally responsible thing to do. As a society we have decided to forgo – temporarily – some convenience, time and perhaps a fiscal quarter or so economic growth in order to protect the most vulnerable 1% – 3% of our population that would suffer the direst consequences of this disease. This is an amazing and positive thing to behold and we will be talking about it for years to come.
As one would expect, the equity allocations in our portfolios have been whipsawed by the recent equity market volatility. Equally as expected, the fixed income portion of our portfolios has done its job and held, or even added, value over the last few weeks. We continue to counsel the power of diversification and the absolute undesirability of selling any of your equity positions into this market. Most of our clients are currently not using their investment portfolios to support their lifestyles. Among those clients that are, most of them have at least two years of spending power in the cash and fixed income portion of their portfolios and are in a very strong position to weather this period of volatility. We know this situation is uncomfortable, but we know that this too shall pass and that the U.S. economy and, with it, the equity markets will return to a sense of normalcy.
If you’re feeling particularly stressed by these market events, we invite you to contact us to discuss your portfolio.