Don’t Touch Your Face (or Your Stock Portfolio)
Published On: March 12, 2020
Written by: Ben Atwater and Matt Malick
The U.S. Centers for Disease Control and Prevention (CDC) is urging Americans to take simple steps to control the spread of coronavirus, including washing your hands often, staying home when you’re feeling sick and avoiding touching your face.
We would also add a piece of financial advice as the pandemic unfolds: avoid touching your stock portfolio too.
The stock market is clearly struggling to price-in the ramifications of coronavirus. The S&P 500 has been registering huge losses most sessions, with the occasional massive recovery day. Within the market, we’ve seen the biggest losses shifting among industries and individual companies. To us, this is a sign of panic selling among investors, probably led by wholesale dumping of the very index funds that drove this market higher for many years.
One of the most important advantages to owning individual companies, as opposed to mutual or exchange-traded funds, is that we know what we own and why we own it. When the market is in free-fall, we can still examine the underlying businesses, long-term sales and profit growth, debt burdens, free cash flows, historical and current dividends paid, etc. While the stock prices are being bludgeoned in the short-term, we can make reasonable assumptions about the long-term business prospects of our portfolio companies and remain confident that a recovery will eventually come.
As we’ve stressed many times, market recoveries come fast and furious and when investors least expect them. In recent days, we’ve spent some time speculating as to what could potentially cause markets to bounce back. One possibility we’ve considered is massive government stimulus coupled with forced social distancing.
With interest rates in the U.S. and across the globe at all-time lows, and even negative in many cases, markets are seemingly unconcerned with government deficits. The U.S. is expected to run a fiscal deficit of over $1 trillion in 2020, yet 10- and 30-year Treasury yields well under 1% suggest that investors aren’t yet worried about America’s ability to pay its debts. Adding to the deficit with a massive government stimulus package seems unlikely to cause near-term problems.
Furthermore, among countries that have reported cases of coronavirus, it appears that those with the lowest rates of infection are the ones that are implementing the strictest policies of social distancing, i.e. closing schools, restricting travel, banning gatherings, etc.
It’s not beyond the realm of possibility that the federal government could pair a short-term shutdown of large swaths of the economy with direct payments to U.S. consumers and businesses to help weather the storm. Such a program is not only possible, but ultimately likely. Much like the financial crisis, markets will force a government response.
Some manner of government bailout seems inevitable at this point. It may take time for the political parties to get on the same page, but the markets will force their hand. Much like during the financial crisis, investors will sit around and look at red screens while waiting for the government to act.
While we obviously have no certainty as to how this crisis will ultimately play out, we must keep in mind that any number of events could eventually turn the tide. Making long-term investment decisions based on short-term developments and the fear they incite is never a good idea.