Published On: February 25, 2020

Written by: Ben Atwater and Matt Malick

As we entered 2020, investors were very bullish about continued bright prospects for the U.S. economy and for U.S. stock markets.  With the outbreak of Coronavirus, these prospects appear dimmed. 

For a broader context on where the market stands, we encourage you to review our note from January 29, 2020 entitled Risk Still Exists

Markets are inherently unpredictable and that’s why market timing repeatedly fails.  However, history has shown that a strong investment process will overcome even major market shocks, including the shock that was the Great Recession and Financial Crisis of 2007-2009. 

During times of market stress, it is important to remember that we’ve built a process with exactly this kind of volatility in mind.  During a short pullback, like in late 2018, stocks bounced back quickly enough that it was simply a matter of us waiting it out. 

In the case of a more prolonged downturn, we’d look to our fixed income positions to dollar-cost-average stock positions or provide liquidity for distributions. 

Will the Corona Correction be the impetus for a prolonged market plunge?  Frankly, it’s too early to tell. Given world-wide supply chains and the multinational character of the Standard and Poor’s 500, we can be almost assured that Coronavirus will impact corporate earnings for several quarters into the future. 

The question then becomes, when will markets begin to look past Coronavirus and toward further government stimulus, something that has been a hallmark of this bull market.  Make no mistake, the U.S. Federal Reserve will take rates back to zero and restart quantitative easing if the market falls much further. 

The biggest short-term risk to markets came today in a subtle but disconcerting message from the U.S. Centers for Disease Control and Prevention who now expect a wider spread of the new Coronavirus in the U.S. and are preparing for a potential pandemic.  Behavior changes that dampen the animal spirits of the all-powerful American consumer would have broader consequences than most analysts are now modeling. 

We will stay the course with our investment discipline no matter how rapidly the situation devolves.  The risk here is legitimate, but the risk of overacting or changing our long-term strategy based on these events is also great because we have no idea how far this will go down or how quickly it will turn up. 

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