Capital markets are inherently vulnerable, and market drops are a normal expectation in investing. How you react (or don’t react) to the downturns is what matters most. The correction seen this week sees the markets oversold by 10%, still less than the forty year average drop of 13.8% as shown in the chart below, but enough to make investors anxious.
Ever since the Chinese government announced an outbreak of a novel Coronavirus in late 2019, markets have been sensitive to any and all related news. Based on previous SARS and Ebola contagions, the key to the virus’ impact on the markets was assumed to be a matter of science and containment. However, trading volatility over the last couple days, whether algorithmic or fundamental (like us), reflects the realization that the outbreak is not as contained as previously thought. The duration of the contagion could be extended into the summer and beyond, and markets are coming to terms with the short-term effects on global economic factors like earnings, interest rates and supply chains.
We believe that health agencies and countries with meaningful outbreaks will eventually control the situation, and the long-term impact of the Coronavirus will end up being relatively benign. Nonetheless, other underlying global economic issues already questionable are now entwined with the health concerns, and further market pain is likely before the situation improves.
Our long-term investment philosophy of preserving portfolio principal while growing capital responsibly seems especially appropriate at this time. Favoring defensive characteristics and high quality securities provides a perceived margin of safety within our portfolios, and are attractive benefits during a market rotation toward safety. Dollar-cost-averaging strategies for investors with longer investment time horizons will have opportunistic entry points in the coming weeks and months. Investors with liquidity needs will cautiously raise cash during any market upticks, or use cash from current yield assets.