Here are the facts as far as we find them relevant to investing:
COVID-19 has led to widespread panic in markets around the world.
Countries are being quarantined, schools are closing and GDP will drop significantly.
Stocks are extremely volatile, rising and falling by up to 10% daily.
There is mass uncertainty at all levels of politics, fiscal stimulus and monetary policy.
History shows us these types of epidemics / pandemics are temporary.
Number 5 is the most important point to investors. This is a temporary situation that will indeed get resolved. In the short-term, there will continue to be volatility but long-term there will likely be a continued uptrend in the economy and perhaps be even more efficient because of the lessons learned from COVID-19.
Should we be more proactive in planning for these types of situations? Yes. Should we wash our hands more to help prevent the spread of disease? Yes. Cities, towns, restaurants, gyms and stores are cleaner and more sanitized than ever before. We are safe.
Investing in this environment. There’s no perfect investment for a pandemic. Things are changing so fast that one day the cruise industry is getting bailed out but the next day entire companies are ceasing operations. We don’t have all the facts yet to make solid investment decisions moving forward. However, we do have history to guide us through these types of crises.
You’ve heard it before, but the best thing we can do in terms of investing is nothing. Don’t be part of the panic selling. Don’t let your emotions drive your decision making, thereby making your situation worse.
At the same time, every epidemic and pandemic that has caused a crash in the stock market has been a buying opportunity in the past. This doesn’t mean, buy 100% equities right now like you’re buying a lottery ticket. The best investment strategy the professionals use is to buy in stages or portions. Don’t bet the farm on the market going up from here. It could go down another 20%.
Let’s learn from how the pros buy and sell in markets. They manage position sizing when buying or selling a position. If you think Boeing is a good buy here, buy 10 shares. Keep buying as conditions change until you meet your desired position size.
Keep individual stocks to 5% of your portfolio and index funds to 10%. This will keep you intelligently diversified. Learn about un-correlated investments. These are holdings that don’t go up and down together. To weather the storm, consider a mix of investments that don’t respond to panic selling the same. Gold, Currencies, Bonds, Growth Stocks, Consumer Staple stocks, crypto currencies and options usually trade in different directions.
Whatever your investment strategy may be, this is not the last pandemic. We will continue to have market shocks like this one. The coronavirus will likely be with us for the next 6 - 12 months, globally. Markets will ebb and flow depending on the news. This we know with certainty.
This is a time to update and enhance (not change) your investment strategy.
Quantitative analysis shows that the S&P 500 is fairly valued right around 2600, with slowing earnings from the big companies that make up the index. That’s right around where we are now. With a bigger hit to GDP and worse than expected forecasts will drive the market lower.
The stock market is indeed efficient at finding the appropriate area it wants to trade at based on forward earnings projections.
Moving forward, schools will reopen, people will fly again, go on cruises again and go back to the way they like to live life. This means demand will come back and supply of goods (TP, hand sanitizer, etc.) will return as well and we’ll again find equilibrium. We always do.
It may take 6 months to get back to normal. It may take longer, but most likely not longer than a year. My personal opinion is the economy gets back on track and is even more efficient than before starting the 2nd quarter of the year (by the end of June) with the crisis fully resolved by the end of the year.
We’ve dealt with epidemics and pandemics before. In 2003 we had SARS. In 2009 we had H1N1. In 2014 we had Ebola and Zika and now we have COVID-19. Every time the market has dipped and then gone higher than before. There’s no fact-based reasoning to think it won’t do the same thing again.
During times of market turmoil, there’s always the question of being in cash instead of holding stocks, etc. Again, this shouldn’t be an all or nothing decision. Holding 5% - 25% in cash is a good, overall conservative strategy. Holding 100% of cash is an all or nothing decision. Remember, the pros who trade markets everyday for a living, trade in fractions of an overall holding goal. Building a 10% cash position is a fine goal, but do it gradually so you can average out your cost basis of that decision.
Our model portfolios update. Stock PRO is holding strong with no new sells and some incremental buying. There are a handful of stocks that are down 50%+ from their highs that are just too good to ignore. Options PRO continues to trade into calendar spreads. These are positions that take advantage of volatility. Index PRO is holding strong and will add to market sectors that have been beaten down the most.
Specific stocks to consider. The one stock that comes to mind is Boeing (BA). This stock has gone from highs in the $400s to around the $160 area. If you think a Duopoly can get back on its feet and recover from multiple crises, then Boeing is a good candidate to take a look at. The airlines have all gotten battered with the slowdown in travel demand. Alaska Airlines (ALK), Delta (DAL), and Southwest Airlines (LUV) are all candidates for picking up shares at bargain prices. The big technology companies we all know are also well off their highs. Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL) and Facebook (FB) are down up to 20% from their highs and look to be rebounding. Oil stocks have been beaten down the most, with some down 90%. The banks have also been sold down to levels we haven't seen in years. Bank of America (BAC), and Citi Group (C) could see some money come back as the economy recovers. If you've wanted to buy a favorite stock, look it up and see where it's trading on a 5 yr chart. You'll see it will likely be near those same levels that it was trading at years ago.
It's not time to panic. It's time to make good decisions.
If you have any questions about our investment strategies, please don’t hesitate to reach out. If you are a client, our door is always open.
Tim Brockman, Chief Investment Officer
Brockman Capital Management