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My wife and I were traveling in Portugal & Spain last week on a trip we’ve spent nearly a year planning.  I’m happy to report it was a phenomenal experience full of incredible sights, sounds and tastes.  We met wonderful people wherever we went and arrived home this week happy and healthy.  In the museums, cathedrals and public places we visited, you could sense that people were going out of their way to avoid touching railings, using hand sanitizer and washing their hands vigorously.  The airports we went through Monday seemed to be on elevated alert with cautionary signs present and additional screenings occurring.

One of the fun things about international travel is tuning into television stations from a variety of countries.  While you may not follow every nuance in a language you don’t understand, you can get a sense of the story and what the world is paying attention to that we in the U.S. might ignore.

On this particular trip, not so much.

Whether a French, German, Portuguese, Spanish or other channel, aside from soccer reruns and the occasional snooker match, two stories were the focus. The spread of the coronavirus (COVID-19) and the fact that markets were sharply lower across the globe as a result.

The amount of information available on COVID-19 in the media, social media and other sources is more than enough to make your head spin, and I am anything but an expert on infectious disease.  As such, I won’t go into detail on the virus itself other than to provide a few links to some data at the end of the blog.  Instead, I’d like to discuss how the market has responded, why and what to do about it as a result.

The Market

As we’ve speculated for years in the current bull market, at some point we will experience some sort of unexpected event that will cause enough of a decline to be considered a bear market and/or send the economy into a recession.  It may turn out this outbreak is that world event, though it’s too soon to tell.

For now, the panicked response certainly feels like that kind of moment with the S&P 500 experiencing a 7.5% decline in February.

Whether an overreaction or not, there are real impacts that the virus will have on the economy.  Disrupted supply chains, travel restrictions, slowdowns in spending in multiple areas of the economy are just a few examples.  But whether that impact is permanent or temporary can’t yet be known.

Meanwhile, the market is going through a kind of panic attack.  It is attempting to price unknown risk into the value of thousands of companies across the globe as always, but with a new variable that is wildly uncertain.  There are certain to be instances of over and underreaction, but no one has the ability to know what those are in advance.  We also have no idea how long this panic will last and, once over, how long it will take for markets to revert to reasonable pricing of risk.

As an example, airlines have been hit harder than most as a result of this outbreak, which certainly makes a lot of sense.  But has the drop in price of these stocks been overkill, not enough or just right?  When should someone looking to take advantage of this buy in?  Now?  Next week?  A year from now?

While this lack of control can be frustrating, it can help protect us from ourselves.  What I mean by that is that even if we did know which companies were under or overpriced or how long this panic was going to last, knowing how and when the market would respond would be another unachievable hurdle.

Today (Tuesday, March 3) is a great example.  The market opened strongly following the momentum from Monday’s record-setting day.  Mid-morning, the Fed announced that they were cutting the federal funds target rate by 0.50%, a move designed to help markets and the economy deal with the crisis.  In the past several years, such cuts by the Fed have been rewarded in markets with significant increases.  This time, investors instead saw this move as inducing more panic and markets turned sharply negative again in afternoon trading.

Keep It Simple & Focus on What You Can Control

In investing or any part of life, when faced with challenging times, it is important to lean on your core beliefs as a guide.

Simplicity and focusing on that which you can control are two of our core mantras here at TAAG.  We can’t control what happens in markets and the economy, but we can control how we react.  We do this by maintaining strict discipline in our investing process and ensuring we’re using all the information available in markets in assessing current risk to rebalance portfolios to optimize opportunity for long term expected performance.

Dimensional Fund Advisors, the company we use to deploy our investment strategy, summed it up better than I could in a recent article on the virus and market declines:

“We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.”

The Virus

As for the virus, much the same is true.  We can’t control the virus, how it spreads, etc.  We ultimately want to do what’s reasonable to keep ourselves and our families safe, but avoid being overcome with fear or overanalyzing data that we at best struggle to understand and at worst have no idea as to its accuracy.

There are a variety of these lists out there, but the best I’ve seen in terms of those actions we can control are as follows.

  • Wash hands frequently – 10-20 seconds with soap
  • Avoid handshakes – fist bumps, elbow bumps or slight bows are better ways to greet someone, or use this humorous suggestion of a Foot-bump from a YouTuber in Asia instead.
  • Avoid touching nose and mouth excessively (noting that we all probably do this subconsciously a lot more than we are aware)
  • Self-isolate if you are sick
  • Seek medical attention if you have symptoms of COVID-19 including fever, cough, shortness of breath
  • Use disinfectant wipes in stores where available or carry some for personal use
  • Keep hand sanitizer around and use when hand washing isn’t available/practical
  • Cough or sneeze into a disposable tissue whenever possible, then your elbow if no tissues are available
  • Use zinc lozenges which have been proven effective from allowing viruses in your throat from multiplying
  • Don’t Panic
  • Be Kind

No information source is perfect, but as I mentioned earlier, I thought it would be worth sharing what information sources we see as fairly reliable in learning how best to prevent the spread of the virus and protect ourselves and loved ones to the degree that we can.

Special thanks to several clients who shared some of the links below.

World Health Organization – Coronavirus Updates & Recommendations

CDC – Coronavirus Updates & Recommendations

American Medical Association

CDC – Travel Restrictions to Italy (this might expand to other countries)

Information on Travel Insurance and Coronavirus Related Interruptions

If you do have any questions about your portfolio, please don’t hesitate to reach out to your advisor.  Stay safe, happy and healthy and have a great start to your March.