Coronavirus and the Stock Market

Coronavirus and the Stock Market

February 27, 2020

According to Bloomberg.com, the S&P 500 stock index is down about 13.5% from it’s all-time highs which were reached last week. Stocks have come under pressure as the markets worry about the spread of the Coronavirus. It appears more likely that the Coronavirus will spread across the globe and create health risks for more people, which will most likely cause a slowdown in the global economy. This is the news the market has been reacting to this week.

What should investors do?

Most of our client portfolios and the investment models we use at Bond&Devick have been slowly de-risked over the past two years as the stock market made all-time highs.  We have a process in place where we first reduce risk in stocks by using higher quality stocks that generally pay a dividend.  The next stage in de-risking a portfolio is to increase the credit quality of bonds (reducing exposure to lower-rated or junk bonds and increasing exposure to higher quality bonds).  The next step is to adjust the alternative investment allocations that use hedging instruments for a portion of the stock portfolio and the last step is to reduce exposure to stocks and increase cash and bond allocations.  We call this the stair-step approach as we slowly walk portfolios down the stairs over time to reduce injury from a sudden fall. 

The reverse is true as well.  After going through a large stock market downturn, we can begin to take more risk by starting to walk back up the stairs.  Had this virus shown up three years ago when our portfolios were more growth-oriented, we would most likely have skipped a few steps in the stairs and de-risked portfolios fairly quickly.  However, for many of our portfolios we are already down on the landing. 

No one knows what the global impact of the Coronavirus will be on the stock market or economic growth.  History tells us we should not expect an economic tragedy, none of the last 6 viral outbreaks were.  However, we do expect a higher level of volatility in the marketplace.  Volatility itself is not dangerous if handled appropriately. 

We believe it is prudent to increase or decrease portfolio risk over time depending on the market environment, however making big changes in the overall allocation in response to short-term market volatility is not how we manage money.  We remain balanced and diversified and focused on our client’s long-term goals.  Our best advice stands: Unless your unique personal situation has changed, tune out the noise and stick with your long-term plan and remember that in times of stress, the best action is often no action at all.

The Bond&Devick Team