COVID-19 – Our Active Risk Management Strategies in Force

 In Strategy Updates

The momentum of events and bad news surrounding the coronavirus has accelerated in recent days causing stock markets to breach new lows as of this morning. As you may have noticed in recent weeks, we have been reducing and rearranging your stock exposure to become more defensive. This morning we have continued these efforts on your behalf. Please keep in mind: we sell stock across all accounts at once, so you may not see these trades in your accounts until the end of the day. Please do not go into your account and sell stock without contacting us first (415) 289-1010.

The Benefits of Risk Management
Though market indexes are down more than 20% from their highs in recent weeks, our risk management strategies have significantly reduced this downside for your portfolio and will continue to do so should markets fall further. As of yesterday’s market close our average account has declined just 6.92% after fees. Your account may vary somewhat depending on 3your asset allocation. Our continued sales this morning will mute market declines further for your portfolio should the news get worse, which it may.

Though experiencing loss in the stock market can be unsettling, it is important that losses do not become so significant that they become difficult to recover from. Hence our continued attention to risk management in markets that have the potential to fall much further than normal – like this one. At this point we’ve simply given back short-term profits gained over the past few months, as opposed to passive/index investors which have given back more than a year of gains. Should the markets fall further, our reduced exposure to market risk will continue to mute downside.

COVID-19 and the Economy
The stock market’s reaction to the accelerated spread of the virus around the globe, and particularly in the US, is directly linked to the negative effect this will have on the economy. We can easily see that economic growth will slow – if not stall or contract – the longer the virus spreads. Since stock prices are linked to the economy and corporate profits, it should be no wonder that shares are falling, and in some cases precipitously. This downside has been exacerbated by the coinciding OPEC price war. One of the reasons your stocks are holding up much better than indexes is that we have avoided some of the areas that have been hit the hardest, including energy (oil), airlines and banks to name a few.

The question that should be on all investors’ minds is, “How long will this virus negatively affect the economy?” This question is hard to answer at this point, but we can make some assumptions:

At some point Phase I of the virus will begin to dissipate. We’ve seen this in Taiwan and China where those who were going to contract the virus did and were quarantined, hence the importance of testing and quarantine. The virus is spreading more slowly in those regions and will eventually cease until perhaps next autumn (Phase II) – when hopefully there are medications to better manage its symptoms.

The US must accelerate testing and quarantine those infected to reduce a further spread of the virus so we may also get to the point of slower contagion. Much work needs to be done towards this effort and until it is, the economy, corporate profits and stock prices will be negatively affected. We think that it is safe to say that months – not weeks – will be required to get this under control.

When there is “light at the end of the tunnel” and the virus appears to be getting under control, the stock market will present a great opportunity going forward, but we are not there yet. We think it is safe to say that we are in a bear market unless a positive development unexpectedly happens. Within a quarter or two global stock markets will have discounted all of the bad news and a new bull market cycle will begin anew – creating a great opportunity for those who are prepared and we will be ready. In the meantime, we will have less stock than normal and own companies that we feel can still be profitable in a slow or receding economy, such as consumer staples, healthcare and utilities.

We hope this update is helpful as we all witness this significant healthcare crisis and pray that it comes to an end soon.

If you would like to discuss your portfolio or have experienced a significant change in your finances please let us know. Also, if you have family or friends who might benefit from our Active Risk Management strategies, feel free have them contact us to see if we can be of any assistance.

Thanks again for your continued vote of confidence!

Your Team at Main Street Research