Update: Thoughts on the Coronavirus and Potential Portfolio Implications

When we wrote our first Coronavirus update on 2/24/20, we didn’t think we would be pulling together a second update only four days later.  Yet here we are on February 28th with most global equity markets down somewhere between 7 to 13% in just the last five days.  We felt the velocity of the move lower substantiated another update.

The first point we’d like to make is that there remains a significant amount of uncertainty around the potential impacts of the Coronavirus.  Equity markets dislike uncertainty.  Uncertainty creates significant amounts of volatility in risk markets and can be observed in indexes like the CBOE Volatility Index or VIX [1].  Below is a chart of the VIX over the last ten years.  For reference, a rising VIX is associated with rising levels of uncertainty which has historically translated into lower equity markets.

[1] The CBOE Volatility Index is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility which is derived from price inputs of the S&P 500 index options.

In our mind, the VIX index’s current reading has risen to a level similar to other uncertain periods in time and may be suggesting better times ahead.

Along the lines of the VIX, other sentiment readings are showing similar levels of “peak pessimism”.  Below is an updated reading on the chart we displayed on Monday (CNN Fear/Greed Index).  As you will note, the current reading of the Fear/Greed Index is suggesting we may be nearing levels associated with turning points in the equity markets.

Source:  https://money.cnn.com/data/fear-and-greed/

Importantly, we wanted to highlight that asset allocation and diversification are working in the current market environment.  As a refresher, the term asset allocation refers to the mix in a portfolio between stocks, bonds, alternatives and cash.  We set our asset allocation targets with clients to account for (1) a client’s risk tolerance, (2) income needs and (3) long-term goals and objectives.  Importantly, asset allocation targets don’t change due to market movements.  They only change when any of the above inputs change.  To further illustrate the power of a long-term perspective, we present the chart below showing that a key variable to successful investing is time in the market and not market timing.

Source:  Wealthofcommonsense.com

This long-term approach to portfolio construction is critical to long-term financial plan success.  We are highlighting asset allocation and diversification to draw attention to the fact that fixed income and some alternative strategies are generating positive returns while the equity markets are declining.

Finally, we wanted to note that our investment team is looking at rebalancing accounts back to target weightings given the performance differential between stocks, bonds, and alternatives over the last week.  This would entail selling bonds to buy stocks.  And while it never feels good to buy into uncertainty, taking advantage of opportunities in a disciplined fashion can add meaningful return over the long run when markets get volatile.  It is impossible to say with certainty how much longer/lower the current drawdown will be, however we take comfort knowing that, as a long-term investor, time is on our side.  We look forward to calmer seas ahead.

[1] The CBOE Volatility Index is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility which is derived from price inputs of the S&P 500 index options.

Authored by:

 

Todd Jones, MBA, CAIA®

Director of Investments
Investment Strategy

Disclosures:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.

About Gratus Capital, LLC

Gratus Capital is a consultative wealth manager focused on serving successful individuals, families, foundations, endowments, and other institutions nationwide. We offer comprehensive financial planning and active portfolio management. Clients benefit from having a dedicated team focused on providing invaluable counsel, recommending intelligent, custom solutions, and upholding fiduciary standards. Contact us today to learn how we can help you reach your financial goals.