The Coronavirus (Covid-19) and the Stock Market
The Coronavirus (Covid-19) has been dominating the news the past several weeks and it is hard to go a day without hearing another alarming report. I wanted to give you my prospective on the Coronavirus and potential impacts on the economy and stock market.
My view of the Coronavirus is both conventional and my own alternative theory. The conventional view is that like every other outbreak, SARS, etc. the damage to the economy is temporary. In this case, temporary could be six months to two years. Following the Federal Open Market Committee's (FOMC) decision to keep the federal funds unchanged on January 29th, 2020, Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, said "Fed will adjust money market plans as conditions warrant.” while delivering his remarks on policy outlook. Markets have priced a 75% chance of a rate cut as of the June’s meeting (a).
My alternate theory is if the world health efforts do not control the virus, it becomes something we live with, like the flu. Unlike the flu, however, it has a higher mortality rate. This higher mortality rate will be slightly mitigated with vaccines, targeted medical treatment, improved screening, and hygiene. I have gone through body temperature checks using medical devices I don’t understand during my recent winter vacation in Malaysia and Thailand that each took 15 seconds.
I believe in either scenario, the long-term health of the economy, including supply chains and the travel industry, will return to normal.
I believe the best thing we can do with your portfolio is to maintain your target allocation and rebalance annually or more often when we deviate from your target. The reason is that most studies show you cannot predict future movements in the stock market. In addition, the strong up days in the market are less frequent and somewhat random, so you risk being on the sidelines during inopportune times. The only certainly is you will lock in capital gains on your taxable accounts, which are taxed at 20% Federal, plus 8 and 9% in Oregon and California respectively.
We should periodically re-evaluate your target allocation based on life changes, your long term goals, and how comfortable you are with the associated market risk/rewards and market volatility.
Please feel free to contact me if you feel you want to discuss this further or reevaluate the appropriateness of your portfolio.
- New York Time, 2/27/2020 and CME Group Tracker.