“Your money or your life?” is the crystal-clear offer that muggers will give their victims to minimize a scuffle. Those, in their right minds, will hand over their wallet and spare their lives. The markets, economy, and investors are getting held-up right now by COVID-19. Though tempting to hold onto on the wallet, it’s time to concentrate on the risk tolerances of your individual clients. The markets and your client portfolios will heal. But home isolation, 24-hour news cycles and the fear of health issues can have even the most sensible investors making questionable decisions.

A Possible Scenario for Investors
Over the past couple of weeks, we have been telling advisors that it will have to get worse before it can get better. Well, here we go. The social media jokes and jabs have turned to real fear. Celebrities, athletes, and politicians have contracted or have been exposed to the Coronavirus. Events, sports leagues, and gatherings are being shut down. The stock and bond markets have become dysfunctional. Central banks and government have moved in to provide much-needed liquidity and support. Welcome to the first phase of this ordeal.

Phase two will be uglier because the number of people infected will shock most Americans. We will all know someone who has contracted the virus or has been exposed. As the number increases, there will be more restrictions for quarantine. Businesses will feel the pain. Small business and their employees will have a heavy load to bear. The call for robust fiscal policy will get louder and the markets will continue to be volatile. This is the phase investors will find most difficult; to stay invested. But this phase is the necessary means for long-term financial recovery.

The Pig in the Python
Phase three will be all about monitoring the “pig in the python”. Nothing is more important for recovery than the successful containment and eventual reduction of new U.S. infections. This virus has a history of infections and recoveries in China, South Korea and other parts of the world. Both China and South Korea have worked hard to slow the rate of infections to a trickle. Like a swallowed pig moving through a python, we can track the rate of infections and see the dramatic drop off in China and South Korea. The virus (or the pig) is moving through these two countries (nearing the end of the python). The same will be true for each country in its path. Recoveries in China and South Korea are now outpacing new infections. China’s stock market has rallied and its people are going back to work. Supply chains are opening up again.

Source: Johns Hopkins

At some point during phase three, after potentially thousands of infections in the U.S., our financial markets will see that U.S. infected recoveries, on a percentage basis, have begun to outpace new infections. The number of people infected will still be alarming, but the improving percentages will be welcoming to investors. At this point, a well-greased market with low rates, Fed driven liquidity, powerful fiscal policy and low gas prices will move much faster toward recovery than the cash-rich faint of heart will be able to anticipate. This is why we stay invested.

What Is My Portfolio Manager Doing?
Our investment team has been actively reviewing each holding and sector to make sure we can take advantage of what will be an inevitable recovery. ACM ‘s investment discipline is growth (or income) at a reasonable price. As a GARP manager, we will use this opportunity to look for securities that might have been too expensive before the correction. We are also reviewing for companies that may present better recovery possibilities than current holdings. In any sell-off, even great stocks get sold. Passive investing in ETFs make it very easy for “the baby to get thrown out with the bathwater”, but good inexpensive companies become very attractive as markets recover and investors want to get back to sensible investing. Be assured any excess cash our managers have will also at some point be deployed based on economic outlook and closely tracking infection recovery rates. This does not mean that our clients need to do the same with their additional cash.

What’s an Investor to Do?
It would not be prudent to take money from your cash reserves and make a plan to allocate more into stocks for a potential upswing. Cash reserves are designed to be large enough so you can let your stocks act like stocks and not have to worry about day to day volatility. Adding more reserve money to a stock allocation may present an unpleasant situation forcing you to liquidate shares in a down market. Markets don’t go straight up. It’s impossible to pick a bottom and your cash needs may not coincide with a jagged recovery.

Depending on your risk tolerance, age, and total assets it is normally not recommended to change your stock to bond allocation at this point in the correction. Shifting to bonds will only slow your eventual recovery. In addition, liquidity in the bond market has been excessively poor in these volatile weeks given the massive market moves. The bid (where you can sell) and ask (where you can buy) spreads are tremendously wide. Bond sellers are likely to get hurt as buyers are demanding a deal to provide such liquidity. Allocating more to stocks may heighten your market anxiety. Investors will have a lot of time at home to question themselves and their fortitude. We urge advisors to be smart when it comes to rearranging your investment allocations.

Why Many Investors Fail
And finally, since markets don’t recover in a straight line, clients may be tempted to raise cash as news become more complicated. When investors leave the market for safety, they have completed only one of two difficult decisions that need to be timed with precision. While investors who have left markets feel better, getting reinvested is where most will stumble. There will not be an invitation in the mail when “the coast is clear”. The difficulty of timing these decisions is evident in how well investors have fared over the past 20 years* versus different asset classes.

Source: Dalbar Inc. JP Morgan Asset Management. Indices used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: the median sale price of existing single-family homes, Gold: USD/troy oz., Inflation: CPI. 60/40: A balanced portfolio with 60% invested in the S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20 year period ending 12/31/18* to match Dalbar’s most recent analysis. Guide to the Markets U.S. Data is as of December 31, 2019.

Can this market go lower? Yes. Until we can measure infection recovery success, the bottom may not have been reached. It is also unclear how long and hard this event will weigh on the economy. Clients must make sure that they have the right amount of cash for expenses, so that liquidating stocks is not a temptation.

As always please call us if you need any support.

Stay Safe, Stay Separated and Be Smart.

About the Author

Kevin Kern

Kevin Kern

Founding Partner