Is it Time to Panic?
Common sense, simple math, or just a basic understanding of history should have told us that the stock market would have a correction at some point. The problem was deciding when it was going to happen. Before the market went up 30% last year? Before it went up 60% in the last five years or 160% in the last ten years? Even if you got it right by anticipating the corrections in 2011, 2015, 2016 and 2018, would you have gotten back in, or left the 30%, 60% or 160% appreciation on the table.
Besides simple math or an uncomfortable feeling in our guts, this correction comes from an event almost no one anticipated, a tiny bug called coronavirus that is doing more damage to the world economy than trade wars, political unrest and fiscal mismanagement combined. The perfect example of a black swan event. Something that seldom if ever happens, but nonetheless is entirely predictable given the number of possible events that could occur. Each being unlikely, but the combined probability almost a certainty over a long period of time.
So here we are in the middle, beginning or end of a market correction. What do we do now? First, let’s look calmly at what’s going on and the likely outcomes. That exercise is not easy given the fact that we don’t know much about the virus, exactly how it is transmitted or even where it is, but stock markets don’t really care. They hate uncertainty and this contagion is full of it. So as the virus spreads around the world, as all viruses do, it is causing panic, economic disruption and real fear. Not what stock markets want to hear.
That’s what is going on and even if we find out that the virus is not as lethal as we thought, which would be the best case scenario, it will surely spread around the globe with every outbreak and death magnified to the equivalent of the black plague. How deep the market correction will be is now largely dependent on how fast this little bug travels and how lethal it is. Nobody knows.
What we do know is that it’s not the black plague and this isn’t the sixteenth century. This is a virus and we now know a lot about viruses. There are about a half dozen in our bodies at any time, and we know how to immunize ourselves from them or worst case, let our bodies do it over time. It just takes some time, but this is a temporary event and we will recover.
Much more temporary than a recession caused by a financial crisis requiring the recapitalization of the banking industry. Much more temporary than fighting runaway inflation that required the shock therapy of astronomical interest rates. And nothing like the damage that would have been done to the world economy if we had continued down the path of trade wars.
No, what we have here is a classic black swan event, which will probably be violent but short. Given that, the right thing to do is to either: 1) Do nothing, continue to hold great companies and wait for the storm to pass or 2) as the market retreats, reassess the relative value of holdings and move some money from fairly valued to undervalued positions 3) slowly add stocks to the portfolio by reducing cash and bonds knowing that we will never pick the exact bottom and doing the right thing for the long run can look foolish in the short run.
Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.