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  • Writer's pictureSteven Sherman

COVID-19 Commentaries

News from the coronavirus has sparked uncertainty in the markets this past week leaving many to feel anxious about not only their investments, but their health should the coronavirus spread. Stock and Bond markets decided last week that it is time to worry about the community spread of coronavirus ( Covid 19 ) and the impact on the world economy. Haven assets such as treasury bonds and gold have benefited from the flight away from risk assets. Stocks around the world declined sharply and moved into correction territory in the past week. I thought that we would highlight some of the commentary regarding the COVID 19 from the CDC and Financial Firms

Situation in U.S.

  • Imported cases of COVID-19 in travelers have been detected in the U.S.

  • Person to Person spread of COVID-19 was first reported among close contacts of returned travelers from Wuhan.

  • During the week of February 23, CDC reported community spread of the virus that causes COVID-19 in California (in two places), Oregon and Washington. Community spread in Washington resulted in the first death in the United States from COVID-19, as well as the first reported case of COVID-19 in a health care worker, and the first potential outbreak in a long-term care facility.

Current risk assessment:

For the general American public, who are unlikely to be exposed to this virus at this time, the immediate health risk from COVID-19 is considered low.People in communities where ongoing community spread with the virus that causes COVID-19 has been reported are at elevated though still relatively low risk of exposure.Healthcare workers caring for patients with COVID-19 are at elevated risk of exposure.Close contacts of persons with COVID-19 also are at elevated risk of exposure.Travelers returning from affected international locations where community spread is occurring also are at elevated risk of exposure. CDC has developed guidance to help in the risk assessment and management of people with potential exposures to COVID-19.

How can investors figure out how long this volatility may last? Timmer: I've always believed that the market discounts the known future, but the future is not always known. Right now, the market is grappling with the price discovery process of not knowing exactly what the repercussions are going to be to the world economy. Further it is unclear what the policy response will be from the Federal Reserve or even on the US government's fiscal response. At the beginning of 2019, the market rallied pretty strongly in anticipation of an earnings and a global economic recovery in 2020. That was based on the assumption that earnings growth would bottom out in the fourth quarter of last year and then rebound in 2020. Clearly, that is not going to happen now that the virus has spread globally. Several large companies have recently preannounced lower earnings estimates for this year. It's possible that earnings might not bottom out until at least the 2nd or 3rd quarter of this year, possibly at lower levels than previously expected. Key takeaways

  • The economy remains in the late part of the economic cycle, but corporate earnings growth is slowing and may not bottom until at least the second or third quarter of 2020.

  • Pandemics tend to curtail growth in the short term. Ultimately, the economy and the stock market have bounced back, though how fast is unknowable at this point.

  • If you have a diversified portfolio of stocks and bonds, the bond portion has risen, cushioning stock losses and underlining the power of asset allocation and diversification

What should I do now?

Worrying excessively about a bear market is counterproductive but being prepared for one is always a good idea. Consider investing strategies that potentially could help your portfolio—and your emotional wellbeing—in case of a significant downturn. Here are some additional steps all investors should consider:

If you don’t have a financial plan, consider making one. A written financial plan can help you craft an appropriately balanced portfolio. It can also calm your nerves and make it easier to stay the course when markets get bumpy: According to a Schwab survey, 60% of Americans with a written financial plan said they felt financially stable, compared with only a third of those without a plan.

Review your risk tolerance. It’s relatively easy to take risks when the market is rising, but market downturns sometimes can be a wake-up call to consider adjusting your target asset allocation. Consider how much loss you have the emotional and financial capacity to handle. Schwab’s investor profile questionnaire can help you determine your investor profile and match it to an appropriate allocation.

Rebalance regularly. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to rebalance at regular intervals.

Take your life stage into consideration. If you’re a younger investor saving for a goal that is 15 or more years away, you have time to potentially recover from a market drop. However, the picture may change for investors nearing or in retirement. Regular rebalancing and appropriate diversification are important for you at this stage, and your risk profile typically will become more conservative as retirement approaches. If you’ve recently retired and begun to withdraw from your portfolio, you also should be aware that poor returns in the early years of retirement can have a very negative effect on a portfolio; consider taking steps to avoid selling assets in a down market, such as reducing your planned withdrawals or postponing large expenses.

  • The Wall Street firm revised its earnings estimate for the year to $165 per share from $174 per share, representing 0% growth in 2020. That is a dramatic move from the consensus. Forecasts still expect earnings to climb 7% this year.

  • “US companies will generate no earnings growth in 2020,” Goldman’s chief U.S. equity strategist, David Kostin, said in a note to clients Thursday. “We have updated our earnings model to incorporate the likelihood that the virus becomes widespread.”

  • U.S. equities have been in a tailspin this week on fears that the deadly virus will dent global economic growth. The rapid spreading of the virus across multiple continents has caused the Dow Jones Industrial Average to drop more than 8% since Monday. The S&P 500 lost about 8.6% and the Nasdaq fell nearly 2.9% in the same period.

  • “Our reduced profit forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US firms, a slowdown in US economic activity, and elevated business uncertainty,” said Kostin.

Are the facts changing? As the virus continues to spread, new information about the economic impact comes in, and the markets continue to slide. It makes sense to take this new information into account. A famous Keynes quote is especially apropos here: “when the facts change, I change my mind.” So, are the facts changing? Short-term risk. One significant fact is. I said yesterday that I use the 200-day moving average as a rough and ready guide to when to pay attention—and the S&P 500 cracked that level earlier today. It has since recovered a bit, but risks of a deeper decline are clearly building. The short-term risk profile has definitely risen. Long-term risk. The longer-term risk profile, however, has not risen. There are a couple of ways to demonstrate this idea. One is to look at subsequent returns after a pullback like the one we are having, which I covered yesterday. Another is to evaluate how interest rates—a very good proxy for investor fear—behaved in previous epidemic situations. CS Advisors will look for opportunities to rebalance strategic portfolios and manage the tactical portfolio’s accordingly during this turmoil.

Please do not hesitate to contact us if you would like to discuss your financial situation.

Please stay safe and healthy.


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