Gaining some perspective and turning attention to offense–
With the current media frenzy surrounding the corona virus, it does seems a bit like the world is coming to an end when you listen to the commentators on television and social media channels incessantly providing “updates” to the current situation. Confirmed cases are almost on a scrolling ticker tape and fear is sweeping the human race. Here in the office we have to almost laugh at the hype and anxiety-laden reporters delivering update after update. They show pictures of people in HazMat suits and toxic waste breathing apparatuses. They talk about patients being quarantined and transported in steel containers. It’s as if these people are dropping dead on the spot. Never do they provide any comforting details or historical context to this frenzy.
Let’s examine some important facts. The corona virus is a respiratory type virus that has caused several thousand deaths. The large majority of those deaths are elderly people with severely compromised immune systems or otherwise unhealthy individuals with underlying health issues present well before being diagnosed with corona virus. While it should be expected that the numbers of confirmed cases as well as deaths will increase before leveling off, the current mortality rate is less than 3 percent.1 This means then that 97 percent of all people testing positive for the virus get better with no lasting symptoms. In this regard, it seems very much like the common cold or the flu (well-known viruses that themselves cause thousands of deaths every year and illnesses which have become a part of normal life). Furthermore, many experts believe that China has grossly under-reported the number of Chinese citizens testing positive for the virus. If this is true, then the mortality rate could very well be closer to 1 percent.
Contrast this with the SARS corona virus which had mortality rate of 9.5 percent.2 Additionally those individuals under age 50 have a mortality rate substantially lower than that.
Why the panic? In a word, media. Fear sells and the main stream media has done one heck of a job creating fear. On top of that, add in the pod casters, bloggers politicians and fanatics of all varieties on Facebook, Twitter and Instagram and well, you get a pretty good understanding as to why so many people have lost their head. To gauge the current fear patterns, consider the 10-year U.S. Treasury Bond which was yielding 1.95 percent in January. In a matter of weeks, the yield has dropped below 1 percent and as of March 9, 2020 yields .51 percent. It is difficult to imagine actually wanting to loan your money to the U.S. Government for 10 years at a .51 percent annual return.
In our mind, the bond market is entering one of the largest bubbles in capital markets history. We do not see how a current investment in government bonds can ever produce an economic benefit. Inflation is currently forecasted at 2.2 percent which means the 10-year Government
bond has a negative real return of 1.7 percent per year. And then there is tax due on the interest so of the .51 percent interest, an investor could pay roughly 30 percent back to the Government for income tax, based on their tax bracket.
Beginning in the 4th quarter of 2019 and continuing into January of 2020, we raised cash levels in our models. This was merely to provide a bit of cushion in the event of a market correction that was bound to happen sooner or later. We aren’t market timers and will never make radical portfolio changes such as twenty or fifty percent allocation shifts. We sold anywhere from 2 percent to 5 percent from equities or equity funds and moved those proceeds into cash (typically money market funds). We are optimistic at current market levels as a re-entry point for that cash; thus, we increased the weightings in equity funds in several models and increased the allocation to growth sectors as well.
As for the bond allocations, we are not comfortable with the current situation. However, to comply with federal guidelines and firm policies relative to client’s ages and risk tolerance, we are not able to remove fixed income allocations entirely. What we did however, was reduce allocations to bond funds by 2 percent to 5 percent across our internal investment models. To be clear, bonds have increased in value during this panic-stricken fear stage. Selling some bond funds here is like selling high, in our opinion. We are happy to be able to trim a portion of these holdings at a profit but at the same time, we are growing increasingly concerned about the valuations being placed on fixed income products, specifically U.S. Governments.
What is going right? First off, equity prices have declined sharply in a very short period of time. Therefore, investors are paying less for every dollar of earnings. This is a good thing for long term investors willing to buy equities. Secondly, the Federal Reserve recently cut interest rates by .50 percent in an effort to stimulate the economy due to corona virus fears. Third, several drug companies are in developmental stages with promising vaccines which are being fast- tracked by the FDA in order to combat the spread of the virus. And Finally, comparable pandemics such as SARS, Bird Flu, Swine Flu and MERS resulted in an approximate 23 percent rebound in stock prices a year after the pandemic was considered contained. In this case, the recovery may well be even larger than the average based on both the excessive decline and the accommodating Fed. The news flow is likely to get worse before sanity returns to equity prices. From our experience, rebounds occur just as suddenly as the declines. Stay focused on the long term and try to avoid media driven reactions.
As always, call us to discuss your unique situation or concerns. We are here to navigate not only smooth sailing, but the inevitable stormy seas as well.
Best regards to you and yours,
Billy, Shaun, Maggie, Molly, and Jessie
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.