In our investing lifetime, you may only see a situation like the recent novel coronavirus (COVID-19) a few times. This is a circumstance where complete candor is necessary. The truth is that we can’t yet gauge the full economic impact, and by the time we can, the volatility may have passed.
Let’s review the actions we have taken up until now as well as our thoughts for the near and long-term future.
In January 2020, we reduced risk in our tactical models. The catalyst for this move was the US-Iran tensions; however, the economic landscape was an equally important factor. Some of our indicators were showing that we were in the late stages of an economic cycle. You can revisit here: https://www.cobblestoneassetmanagement.com/blog/tactical-risk-reduction-amid-rising-conflicts
So where are we now?
Across the board, our managed models are down considerably less than the broad US market. Depending on the risk of your portfolio, we range from being down one third as much as the market to slightly over half the decline. While account statements are certainly going to be lower, the reality is that we have fared much better than the US stock market over this decline. From a tactical perspective, this gives us options. Until this point, we have been playing defense. We are now at a pivot point where we start to choose our spots and take growth-oriented positions.
What happens next?
In the short-term, there are two large unknown variables still ahead. First, we have to see the actual extent of virus infections as well as the impact on our health system. Second, we’ll see the economic reality of a ‘social distancing’ policy when companies report quarterly earnings over the next several months.
If we see a surge of optimism, perhaps due to pending government stimulus then we may use this to take additional risk off of the table. On the contrary, if the market moves lower then we will accept the short-term risk in exchange for the potential upside after the uncertainty passes. In this scenario we would rotate towards the market.
There has been a lot of panic in the marketplace, and we want to end by assuring you that there has been no panic here in our office. We’re calm and focused on attaining the best trade-off between risk and return for you.