Coronavirus Thoughts
Global stock markets have fallen approximately 10% over the past week, undoubtedly in response to the global spread of the COVID-19 virus. Safe haven assets, especially government bonds, have continued to rally, and both ten and thirty-year Treasury bond yields have reached their all time lows. The two-year Treasury now yields 1.37%, and the ten-year yields 1.55%. You are paid only slightly more to lend to the government for ten rather than two years, and neither yield is at all appetizing when considering annual inflation of 2% plus. And yet investors (though not this one) have not been able to get enough of these deals over the past week.
It is impossible to predict the ultimate trajectory of the virus, its impact on global health, or its impact on the global economy. However, credible indicators and viewpoints are that the virus will continue to spread given its highly transmissible nature; may cause severe health complications and even death in large numbers (potentially 2% of an infected population, which could conceivably reach 50% of the entire U.S. population) given its production of pneumonia-like conditions especially in older patients with existing health issues; and has and may well slow global economic activity. Supply disruptions, for example in auto parts, are being reported and are expected. A vaccine for the virus is likely approximately a year away.
We have some market history (see chart) from recent epidemic outbreaks provided by Dow Jones and it generally shows recovery of markets subsequent to subsidence of an epidemic. That history does not, of course, mean the history of COVID-19 will eventually be the same, but it is nonetheless helpful to recognize.
As always, I want to remind you of the following key points.
Every single share that was sold by a seller in the past week was purchased by a buyer. Unless all the sellers are brilliant and all the buyers are fools, we must assume that a fair exchange was made.
The market knows far more about the virus and just about everything else than any of us individually knows. Every day, prices are set given all available material public information, no more, and no less.
When securities prices fall, all things equal, future implied returns rise. Accordingly, my interest in acquiring securities generally rises when markets fall, and that is the case right now. I have sold nothing from my own personal account, am not considering doing so, and if anything am far more likely to acquire stocks for my personal account.
Every year – every year – stock markets fall into negative territory at some point. It may be hard to remember now, but markets were down almost 20% at the end of 2018, just a little over a year ago, over recession fears (that did not materialize at the time).
As noted above, while stocks have not been and are not exactly cheap, bonds are downright historically expensive, and do not therefore represent a compelling long-term investment opportunity.
Stocks, like all financial instruments, are valued based on their future, long-term cash flows. While the virus is having immediate impacts to commerce, especially to travel-related businesses, it seems reasonable to imagine that, with a vaccine in place, commerce will return to normal. If that is the case, markets will again, and in relatively short time compared to the very long duration of future cash flows from stocks, value stocks accordingly.
Your personal financial situation is by far the most important thing to consider in reaction to market volatility. As always, I am available to discuss this with you should you wish to do so. Please do not hesitate to contact me if so.
I am spending much time watching markets and prices, and learning about viruses and their spread. My hope is that the many courageous trained health professionals who guide the world’s scientific responses to viral outbreaks will help the world move through this period with a minimum of distress.
In the meantime, it’s my privilege to serve you and if I or our staff can be helpful in any way, please let me know.
Leonard Golub, CFA
Fiduciary Financial Advisor