Yesterday, global stock markets fell sharply. The Dow, for instance, was down 3.56%, and the S&P 500 Index dropped 3.35%. We would like to briefly address the reasons and share some of our immediate thoughts about portfolio positioning.
The most frequently cited culprit for the sell-off was the heightened concern that emerged over the weekend about the spread of the coronavirus from China to other places in Asia and Europe. Worries mounted that previously assumed disruptions to global supply chains might be too conservative and that there may be a more severe hit to global GDP growth as a result than had been already initially factored into market prices.
A second potential factor, but much less discussed, is Bernie Sanders’s win in Nevada’s primary over the weekend, as well as his political momentum going into South Carolina’s presidential primary this weekend and Super Tuesday next week. Previously, when certain presidential candidates such as Sanders or Warren have surged in the polls, equity markets have briefly shown some jitters. That was likely a contributing factor yesterday. As a case in point, healthcare and insurance stocks were down much more than the broad market Monday, and those decline differentials may not be fully explained by coronavirus fears alone. For example, Cigna was down 7.7%, double that of the S&P 500. Senator Sanders has advocated reshaping those industries, and U.S. equity markets may have been additionally adjusting to his more solidified frontrunner status.
What are we thinking about portfolio positioning in light of yesterday’s stock market declines?
First, we generally do not react to short-term developments. Our portfolios are diversified and built for long term time horizons. Coming into the year, given elevated valuations after last year’s gains and other unsettled matters geopolitically, including presidential politics, a pullback might be in the offing. We did not anticipate a surprise viral epidemic, but we believe that is also the sort of thing that our portfolios are sufficiently diversified to withstand.
Second, would we de-risk the portfolios on further weakness? It is always something that we consider, but most likely not. For some of our clients and their portfolios, we would be more likely to recommend adding equities on persistent weakness than to de-risk portfolios further. This presents an opportunity to buy into assets at more attractive valuations.
Third, although there are some important differences from the 2003 SARS episode, including China’s greater economic heft and deeper integration into global supply chains, we still think the disease’s impact on the global economy is going to be temporary and largely contained to the first half of 2020. The current coronavirus has a 2% mortality rate, which is more akin to a super-charged flu, as opposed to Ebola or SARS, which saw mortality rates of 90% and 13%, respectively. What yesterday’s market action likely reflects in part is the market’s discounting of an additional dent to 1st Half 2020 GDP and broader supply chain disruptions than before the news broke over the weekend about additional cases in South Korea, Iran, and Italy.
Finally, it may be helpful to keep in mind these two points: (1) our portfolios have diversifying stabilizers to help with volatile periods such as this, and (b) many of our managers have wide mandates that will allow them to act nimbly and even opportunistically in this climate.
We are not complacent, but we also are not panicked. We do not know if the worst of the fears about and responses to the current coronavirus have passed, but we also still believe that they will pass. When they do, we are confident in the recovery.
As always, please do not hesitate to contact us if you would like to discuss anything.