Thoughts on the Coronavirus Outbreak
Everyone must acknowledge that no one knows with certainty how the coronavirus will play out or how bad it will eventually get. What we do know is that panicking or overreacting to news headlines is never a good investment approach. There are always uncertainties and unexpected external shocks that can hit financial markets—at any time.
It now seems likely the coronavirus is serious enough that it will have at least a negative shorter-term impact on the global economy and other economies with close economic or trade ties to the Chinese economy. But assuming this doesn’t turn into a severe pandemic, the economic impact still seems likely to be relatively short-lived—maybe a couple of quarters, followed by a make-up period of above-normal growth. It is unlikely to have a lasting, long-term effect on the global economy, but it would cause a delay in the current nascent economic recovery. Lower stock prices and lower valuations create better forward-looking expected returns.
Even if the virus news gets worse and triggers a major stock market correction or full-on bear market (20%-plus losses) in foreign and U.S. stock markets, our portfolios are already prepared and positioned for that possibility—both structurally/strategically and tactically. We’ve discussed the potential for a bear market and stress-test our portfolios for a severe 12-month downside, no matter what the specific “catalyst” or cause may be.
However, at this time, based on what we think are the most likely outcomes—while acknowledging that there is still a great deal of uncertainty—we do not believe this event changes our medium- to longer-term scenarios or the key underlying assumptions for our five-year expected return estimates for stocks and bonds. Therefore, at this time, we are not making any portfolio changes in response to the coronavirus. Though, we continue to closely follow developments and the trajectory and spread of the virus. History suggests equity markets will start to rebound once the rate of daily new cases peaks and starts to decline.
The bottom line is we continue to view foreign stocks as more attractive on a medium-term (five-year) outlook than U.S. stocks. We continue to view U.S. stocks as overvalued and likely to deliver low or very low returns over a medium-term basis—not compensating us fully for their risk. Hence, we remain underweight to global equity exposure overall, with a modest tilt toward foreign stocks within our overall equity underweighting.
At River Capital Advisors we help our clients develop an investment plan that is designed to withstand a variety of market and economic conditions. If you would like to learn more about how we can assist you or if you’re interested in a free second opinion on your current investment portfolio, please contact us.