Yesterday, global stock markets fell sharply. The Dow, for instance, was down 3.56%, and the S&P 500 Index dropped 3.35%. We would like to briefly address the reasons and share some of our immediate thoughts about portfolio positioning.
The most frequently cited culprit for the sell-off was the heightened concern that emerged over the weekend about the spread of the coronavirus from China to other places in Asia and Europe. Worries mounted that previously assumed disruptions to global supply chains might be too conservative and that there may be a more severe hit to global GDP growth as a result than had been already initially factored into market prices.
A second potential factor, but much less discussed, is Bernie Sanders’s win in Nevada’s primary over the weekend, as well as his political momentum going into South Carolina’s presidential primary this weekend and Super Tuesday next week. Previously, when certain presidential candidates such as Sanders or Warren have surged in the polls, equity markets have briefly shown some jitters. That was likely a contributing factor yesterday. As a case in point, healthcare and insurance stocks were down much more than the broad market Monday, and those decline differentials may not be fully explained by coronavirus fears alone. For example, Cigna was down 7.7%, double that of the S&P 500. Senator Sanders has advocated reshaping those industries, and U.S. equity markets may have been additionally adjusting to his more solidified frontrunner status.
What are we thinking about portfolio positioning in light of yesterday’s stock market declines?
First, we generally do not react to short-term developments. Our portfolios are diversified and built for long term time horizons. Coming into the year, given elevated valuations after last year’s gains and other unsettled matters geopolitically, including presidential politics, a pullback might be in the offing. We did not anticipate a surprise viral epidemic, but we believe that is also the sort of thing that our portfolios are sufficiently diversified to withstand.
Second, would we de-risk the portfolios on further weakness? It is always something that we consider, but most likely not. For some of our clients and their portfolios, we would be more likely to recommend adding equities on persistent weakness than to de-risk portfolios further. This presents an opportunity to buy into assets at more attractive valuations.
Third, although there are some important differences from the 2003 SARS episode, including China’s greater economic heft and deeper integration into global supply chains, we still think the disease’s impact on the global economy is going to be temporary and largely contained to the first half of 2020. The current coronavirus has a 2% mortality rate, which is more akin to a super-charged flu, as opposed to Ebola or SARS, which saw mortality rates of 90% and 13%, respectively. What yesterday’s market action likely reflects in part is the market’s discounting of an additional dent to 1st Half 2020 GDP and broader supply chain disruptions than before the news broke over the weekend about additional cases in South Korea, Iran, and Italy.
Finally, it may be helpful to keep in mind these two points: (1) our portfolios have diversifying stabilizers to help with volatile periods such as this, and (b) many of our managers have wide mandates that will allow them to act nimbly and even opportunistically in this climate.
We are not complacent, but we also are not panicked. We do not know if the worst of the fears about and responses to the current coronavirus have passed, but we also still believe that they will pass. When they do, we are confident in the recovery.
As always, please do not hesitate to contact us if you would like to discuss anything.
Recent Posts
Insights: Coronoavirus Worries Stocks in January, But Lasting Economic Effects Likely Limited
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates in this letter are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual client portfolio returns may vary due to the timing of portfolio inception and/or client-imposed restrictions or guidelines. Actual client portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Sage Financial Group. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. Sage Financial Group is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Sage Financial Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
Sage Financial Group has a long track record of citations and accolades. Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that s/he will experience a certain level of results if Sage is engaged, or continues to be engaged, to provide investment advisory services. Nor should it be construed as a current or past endorsement of Sage by any of its clients. Rankings published by magazines and others generally base their selections exclusively on information prepared and/or submitted by the recognized advisor. For more specific information about any of these rankings, please click here or contact us directly.
© 2020 Sage Financial Group. Reproduction without permission is not permitted.
