Current thoughts

The volatility continues!

Since my last Friday thoughts, things have gotten worse with the COVID-19 outbreak, and even worse in regards to the reaction to it. I thought I’d share my thoughts given the updated global situation.

This is a serious illness and issue. I don’t want to downplay the severity of it. That being said, it seems as though the global response is having a more disruptive impact than the illness itself. As I write this (Thursday morning, March 12th), the global cases are just over 127 thousand and deaths are just over 4,700. They have been growing globally, but have trailed off to just a handful of new cases in China. While we don’t ever want to lose anyone, the numbers are still well below previous global pandemics.

We must live in the reality of the world, however, and the reality is that the world is reacting to this outbreak with severe measures. These measures will have a massive impact. Some will be short lived, some will be longer term.

With travel from Europe stopped for 30 days, sporting events cancelled or held without fans, and entire communities shut down, there will be a loss of trade and economic activities. A loss of economic activity will lead to lower profits to companies and unfortunately, a loss of income for some who rely on these activities like waitresses and small business owners. I expect to see an increase of layoffs as businesses have to adjust. I hope that these will be short lived, and will recover as the fear of the virus abates.

The longer term impacts are likely going to be around the global supply chain. Over the last 10-20 years, the world has become more globalize, especially in manufacturing. For example, the Boeing jets manufactured in Charleston use parts manufactured in Europe, South America, and Asia. Since parts of China were effectively shut down for a month or better, some of those parts may not have been made. Now, the same thing is happening in Italy and other parts of the world. These are issues aren’t as easy to recover from.

The most obvious impact has been the stock market. As of Wednesdays close, the Dow Jones Industrial average has hit bear market territory down 20%. The S&P 500 will probably close there on Thursday. As I’ve always said, stocks follow profits over the long term. The markets don’t like unknowns and discount stock values when unknowns are present. We don’t know what the impact to profits will be, so we don’’t know how to price the markets - so it gets discounted. There is no way to know how long this impact will last.

So, what do we do? There are two quotes that come to mind. The first is from a Rudyard Kipling poem “IF” - If you can keep your head when all about you, Are losing theirs and blaming it on you, If you trust yourself when all men doubt you, But make allowance for their doubting too … Yours is the Earth and everything that’s in it, And - which is more - you’ll be a Man, my Son! I’ll share the other at the end of this e-mail.

This is not the time to make quick decisions. The suggestions that I made last week are still true today. If you are still working or have money available, this is a great time to increase your contributions to your retirement plan and invest in high quality companies. As I said earlier - stocks are being discounted due to unknowns. When I see sales at Simpsons, C Anthony’s Menswear, or Piggly Wiggly I buy. Why are quality stocks any different? If you are retired and/or are having to take distributions from your investments, this may be a good time to review the risk profile of your portfolio.

As the stock markets around the world have sold off, there has been a “flight to safety”. That means that people have been buying bonds. So, if you have a portfolio that has a large allocation to bonds, and a lower allocation to stocks, you haven’t fared as bad as the total stock market (lower risk profile). And that is exactly what I had suspected would happen.

Here are some other suggestions for dealing with this global situation -

Take a careful look at your monthly budget. If there are places that you could trim a little, it may not be a bad idea, especially if you are having to liquidate some of your portfolio to live off of. If you’re still working, trim a little to increase your savings and/or add to your investments.
If you were planning on taking a trip or go to an event that’s been cancelled, consider spending that money on something local like a few nights out to eat at a local restaurant, or stay in a nearby hotel for a night. These businesses will be hurting with the lack of travel and could use your support. (This was my wife’s idea, so I give her the total credit for it.)
Pray for those directly and indirectly impact by the virus, along with the healthcare workers and the global leaders who are having to make difficult decisions about how to cope with it. I realize that it may be politically incorrect to ask people to pray, but I believe in the power of prayer.
Lastly, try not to live in fear. There is always a reason to be fearful. The media seems to thrive on it. I remember back to Y2K, September 11th, the Financial and Housing Crisis, SARS, Ebola, H1N1 Swine Flu, and so many more. We’ve survived those and we’ll survive this.

I’ve had a number of clients call and ask if this would be a good time to increase the risk profiles of their investment portfolios. While I do think that there will be a great opportunity to rebalance portfolios and increase the risk profile, I don’t like the idea of doing it in the midst of the type of volatility we’re seeing today. There are a number of things I’m watching to guide my decision in regards to risk profiles, too many to bring up in an e-mail such as this. As I monitor these, I plan on continuing to send regular communications such as this.

One thing not to do right now is make a dramatic shift in your strategy or investment vehicles. I’ve already seen an increase in advertisements of sales people pitching products such as insurance and annuities by playing off of fear. While those may be suitable products, I would suggest going slow, perhaps waiting until things calm down to make any changes such as that.

I’m currently available via e-mail, phone, and in office appointments to review your situation. If it becomes the case that local schools are closed, my ability to meet face to face could become more difficult. I will always be available via phone and e-mail, though. I operate on a laptop and can do a virtual meeting, even if I have to do so from home.

The second quote to keep in mind today -

Do not be anxious about anything, but in every situation by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus. Phillipians 4:6-7

Jonathan Zimpleman