Blog post #433
Since we first wrote about the coronavirus two weeks ago, the virus has spread to more countries including the US, and global stock markets have declined significantly this week.
However, even with the declines of the past week, clients should remember that your fixed income allocations have increased in value (as interest rates have declined) and provide a strong foundation of stability for your portfolio and any near term cash needs.
Talk to us if you have concerns: We want to emphasize that if you have specific financial concerns or want to discuss the impact of this situation to your portfolio or financial future, please contact us.
While we stress a long-term approach to investing, if you have short-term concerns, now is the time to talk to us about that. That is what we are here for.
Keeping things in perspective: please remember that point drops in stock market indices can sound much worse than the percentage changes. As we wrote about a few weeks ago, a 1,000 point decline in the Dow Jones Industrial Average (DJIA) may sound worse than a 3-4% decline.
The future? We cannot make any predictions or forecasts of what the future will hold or what the full impact of the coronavirus will be. As global health officials are not able to do this, we certainly cannot anticipate what will occur in the coming weeks or months.
There are a wide range of possible impacts and outcomes. It is very possible that the short term (the next 3-6 months) financial impact to companies and stocks may be far greater than the actual health issues or number of deaths caused by the coronavirus.
It is possible that the the spread of the coronavirus to the US and other parts of the world will cause much greater disruptions to supply chains and every day lives and economic activity than was generally anticipated only a week or two ago. If this were to be the case, then it is possible that US and global stock markets may decline much further in the near term. There is no way to know this.
However, we think this issue is quite different than what occurred in 2008-2009, as that was a material economic decline that took years to recover from. If government and health officials act efficiently and pharmaceutical companies are able to promptly develop vaccines and other treatments, the coronavirus should not be a long lasting disruption to consumers, countries and companies…..and stock markets would likely bounce back before the coronavirus matter is fully resolved.
We do not recommend making any specific investment changes due to the coronavirus outbreak. As we have discussed in the past, to try to “trade” or “time the market” based on a specific event, you must be correct in your timing…twice. As markets react to news and information so quickly, as well as rumors, this is not likely to be a successful strategy.
While it is very possible that global stock markets may continue to incur losses and be much more volatile due to the coronavirus in the short term, we feel a strategy of adhering to your long-term investment plan and asset allocation makes the most sense.
Stock prices are most directly impacted by current and future earnings. Companies based in the US and globally will be impacted, but to varying degrees. Most companies thus far have not determined what the financial impact will be and very few companies have released specific statements or changed their future earnings guidance. We presume that many more companies will be announcing reduced short-term earnings guidance in the coming weeks or months, which is what prompted part of the market sell-offs this week.
We want our clients to know that they have very little direct exposure to companies that are actually based in China. For example, if you have a 60/40% stock/fixed income allocation, Chinese-based companies account for approximately 2-3% of the globally diversified portfolio that we recommend.
However, it is important to note that the impact of the coronavirus now appears to be impacting globally beyond Chinese companies or those that have historically relied upon Chinese consumers, Chinese tourism and spending for a significant part of their revenue and profits. The virus may lead to consumer and supply chain disruption issues on a global basis.
There may be further short-term declines, which could be significant, and stock market swings based on health reports, either positive or negative, due to the coronavirus. Volatility may continue to increase if the coronavirus outbreak persists in China, continues to spread in a more significant manner to other parts of the world, and if the real or perceived impact affects every day lives in the US.
Interest rates have continued to drop in the US, due to the coronavirus. This has created another opportunity for mortgage refinancing, or low rates if you are looking to purchase a house, as mortgage rates for 15 and 30 years are extremely low.
The price of oil and some other commodities have dropped significantly due to the reduced demand, because of the major shutdowns occurring in China and reduced economic activity elsewhere.
We again encourage you to talk to us if you have concerns about these current conditions.
If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.