Thoughts on the Market

February 28, 2020

With fears of coronavirus spreading around the globe and its major impact on global economic activity, the S&P 500 this week has suffered one of its worst weeks in history, underscoring just how fast sentiment can change from optimism to extreme pessimism in the stock market. Our view on the virus has not changed since our post on Monday – we do not feel it is a wise decision for long-term investors to take a position on the severity of the virus relative to what is already encompassed in market prices and thus our client benchmarks. While official statistics in China have shown dramatic improvement this week, it is hard to know how much they can be trusted; there may be underreporting due to political reasons or simply lack of available test kits. It was encouraging yesterday to see Starbucks reopening stores in China saying the situation was “improving” and Apple say it is reopening factories in China as the country “gets coronavirus under control.” Meanwhile, the virus’ spread outside of China has clearly gotten worse over the past week. The outlook for the market will depend on how the virus unfolds over the coming weeks, keeping in mind that this week’s market move means it is already encompassing things to get worse from here.

The work our team is currently doing in client portfolios is reminiscent of October-December 2018, when the S&P 500 fell nearly 20%. At that time (see 11/20/18 post) we wrote:

You may be wondering how the workflow of our Investment Team adjusts in response to market corrections and the concurrent pickup in volatility. As long-term investors who are not attempting to time the market, the simple answer is that our investment methodology and portfolio risk management procedures do not change. We do not panic, we stay the course. That said, we are naturally busier for two key reasons:

1. The volatility can create large price swings in individual stocks, significantly changing our relative rankings and prompting more trading.

2. While we believe the swing in investor sentiment from positive to very negative has been a major contributor to the recent decline, there has also been new information and risks that have caused justifiable moves. These up-to-date fundamental changes must be incorporated into our thoughts on a company before we trade.

The same is true today. We continue to stay the course and invest clients as best we can to maximize future after-tax returns subject to the clients’ target risk level. We continue to believe that one of the worst mistakes a long-term investor can make is selling equities during a period of extreme pessimism and market declines.

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