"May You Live in Interesting Times"... (per Wikipedia)....is an English expression which purports to be a translation of a traditional Chinese curse. While seemingly a blessing, the expression is normally used ironically; that life is better in "uninteresting times" of peace and tranquility than in "interesting" ones, which are usually times of trouble. It's doubly ironic then that this current period of turmoil that global stock markets are currently experiencing is the result of a virus that has its origins in the Wuhan region of China. Anyone that has been watching the news over the last 4-6 weeks doesn't need me to re-explain what is going on. For some time now, US markets have been trading at stock market multiples (to earnings, cash flow, etc) that are very rich, by historical standards. There are a number of reasons that this can be attributed to, and money managers love to analyze and debate this subject. But without doubt, one of the most obvious is that continued low (and declining) interest rates have the tendency to drive investors away from the safer, but lower-yielding asset classes of US Treasury and corporate bonds, CDs, etc., into securities with a higher risk profile, such as stocks, and the ETFs and mutual funds that have stocks as their primary holding. During a market environment such as this, market participants/investors tend to get complacent, and often times will even want to increase their exposure to higher risk asset classes that have enjoyed recent out-performance. This is the road US markets have traveled.
In the US, probably most of us became aware of the COVID-19 coronavirus from media reports beginning in mid-January. For a number of weeks - as the virus, and its symptoms and illness spread - our stock market "thumbed its nose" at the building clouds on the horizon. Stock markets happily marched to new all-time highs, ignoring the possible threats: to human health, to global supply chains, to corporate earnings, and to affected global economies. Whistling past the graveyard... Well, there's another old Wall Street saying that goes something like this: "It won't matter....until it matters." It matters now. On Wednesday, February 19, the Dow Jones Industrial Average (DJIA) traded as high as 29,409 - within a "sneeze" of the previous week's all-time high of 29,568. Over the next 7 trading days , the DJIA proceeded to drop steeply, to put it mildly, printing an intraday low of 24,681, a decline of 4,887 Dow points from its very recent highs. Fortunately, the market closed that Friday over 700 points off the low. The following Monday (yesterday, as I write this article), markets continued the sharp bounce, with a record point-gain of +1,293 Dow points! Ya' gotta like that. Yesterday is over. Today is another day. The US Fed announced a "surprise" interest rate cut this morning of 50 basis points ( .50%). After a near-vertical and instant 700 point gain following this announcement, markets rolled over and have closed today at down 785.
Much like what could be said in the fall of 2008, Mr. Volatility is back in town, and he seems to be mad! The reassuring truth that we can all turn to in times like this is that this too shall pass. Markets periodically have these "earthquakes", and usually after earthquakes there are the predictable and often-violent aftershocks. In all probability, this time should be no different. Eventually. That's the good news. The less - good news is that we (all of us!) really don't have much real-life experience with what appears to be some version of a developing global pandemic. How far does this spread? How many people get sick/perish? How long does it last? Does it fizzle out with the warmer temperatures of approaching Spring and Summer? How many businesses and industries (and by extension - their profits) are meaningfully impacted by an extended "stay-at-home-time" of reduced consumer travel and spending due to quarantines or general fear? These are the questions that we all have no way of knowing. We are always and forever trying to predict an uncertain and unknowable future. But that doesn't relieve us of the responsibility of trying. We need to make good investment decisions based on the best information that we have at the time. As I look inward, these thoughts come to mind:
We still firmly believe in the time-tested principles of Asset Allocation. We believe in pragmatically observing markets - not being afraid to hold larger allocations to cash and bonds (which we have been doing for many months now, thank you!) when markets look expensive and hence more dangerous. And yes, there will come a time when we will deploy that cash, buying when great companies and their stocks are trading at more attractive prices than they have been in the recent past. Not sure exactly when that time is...but it's coming. Therein lies the elusive silver-lining. In the world of investing, one principle has always held true, no matter what: Starting price matters. The price you pay for a stock determines what you eventually make on that stock. In other words...don't overpay. This selloff and market fear has reduced prices, all things being equal. I think we will know all too soon where this goes from here. We will follow the developments, and make investment decisions as wisely as possible. Our thoughts and prayers are with the individuals and families that have been - and will be - affected by this illness. May we all be healthy and blessed. Thank you for your friendship, and for the opportunity to serve! The Sphere Wealth Management Team
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