LEVATUS Q & A | Coronavirus and the Wild Week
LEVATUS answers your questions about the Coronavirus and the Wild Week in the market.
Senior Client Advisor Jessica Grande sat down with Susan, Levatus CEO and CIO, to chat about markets, the Coronavirus, her perspective on portfolio positioning and what’s ahead after this volatile week.
So, this has been a volatile week in the stock market. What is causing this sudden and sharp decline?
The velocity and depth of the decline had a lot to do with the simultaneous emergence of multiple areas of uncertainty. News about the coronavirus took a turn for the worse and with-it uncertainty about outcomes. Valuations in the market had become stretched reaching +19x earnings after the big rally from October to January. The potential change in the policy landscape in the US gained attention as the Democratic primaries got underway. The news items injected uncertainty and the price of stocks had gotten ahead of themselves.
I keep seeing the term “correction” being used. What does that mean?
The technical definition of correction is a peak to trough move in the market of more than 10%. Historically, this magnitude of correction has been quite typical for markets, happening about once a year. Thus far this correction puts the S&P back to where it was last October.
Also, I have seen that this is the “worst week since the 2008 financial crisis. Should I be concerned? Are we heading into a recession?
Market moves that are this fast and deep are unsettling, even if you are well positioned for them. The moves themselves can cause panic in which selling begets selling, and after a +25% year in 2019 there was quite a bit of euphoria in the market.
If the virus spreads and lingers for more than a quarter or two then the economic impact could push the global economy toward a recession. If past health emergencies like SARS prove to be good estimates as to the tenor and depth of the impact, this is likely to be a short-term hiccup. In terms of the extent of the correction thus far, the following chart of Nvidia, a cloud computing company, is telling. The recent drop has been steep but the trend of businesses such as this remains quite positive.
When are equity prices going to stop dropping?
Subsequent to this recent sharp move lower, the prices of many companies have become attractive for those who take a long-term perspective. That said, what market participants are looking for now is not so much attractive prices but more certainty on the questions we mentioned earlier. How long will the virus last? Is there a risk that there could be significant policy changes in the U.S. as a result of the election? We expect that additional clarity with which to make decisions will emerge in the next few months. This doesn’t mean that the market will continue the sharp decline it has experienced in the last week during that time, but it will take some time to heal and gather information.
What should I be doing now?
You should be enjoying life. Proper asset allocation means that the broad structure of your assets takes into account these bouts of market volatility before they happen. You shouldn’t need to take corrective action unless something significant has changed in your life. In addition, our clients have had some dry powder set aside in advance of this market decline, which leaves them in a great position to take advantage of volatility once additional clarity on the virus emerges.
As prices move about there will be opportunities to increase exposure to well-run companies that will benefit from long-term trends. Some of these trends may even be accelerated by the events we are experiencing today. This includes trends like remote work infrastructure which depends on the cloud computing platforms of companies like Microsoft and Amazon, along with companies that support these data centers like Nvidia. Companies that are enabling 5G, which underpins the speed necessary for advancing these technologies should also rebound. Now more than ever discipline is the friend of long-term returns.
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