The Coronavirus & Investment Process

rogernusbaum

The Coronavirus situation is escalating in terms of number of sick people, curtailment of travel and capital markets reaction. As I write this, the S&P 500 is down about 80 points, or 3% ± . That decline has been over the course of a couple of weeks so the extent to which that is slow or fast is still up in the air and it's not all attributable to the virus.

At this point no one can know what the Coronavirus will evolve into. It's a good bet it won't be anything like the Spanish flu if for no other reason, we've had some medical advancement in the last 102 years. The current, seemingly big ramp up in the number of people infected might not be what it appears. A few days ago, I saw a report on Bloomberg that set an expectation for the numbers to go up a lot in the second half of this week as more medical professionals were assigned to work on this. The increase isn't necessarily isolating real growth. This effect will of course diminish and it will be at that point where an increase in the number of infected will represent real growth, not the initial burst.

I am not dismissing the spread, I am just saying we don't know yet.

From here, the 200 day moving average (DMA) for the S&P 500 is about 7% away after the 3% drop we've had so far. My investment process is to slowly initiate defensive action when the S&P 500 breaches its 200 DMA. I've actually maintained positions in a couple of defensive tools over the last year or so with BTAL and TAIL, they usually go up when the equity market goes down as does gold. There are no absolutes, I am saying usually and that is good enough for me.

With it being so late in the cycle or maybe better said, with the cycle having gone on for so long it makes some sense to reduce portfolio volatility or reduce the extent to which the portfolio looks like the stock market. This can be a delicate balancing act because with too much in diversifiers, you might miss out on a reasonable amount of upcature if the market keeps going higher. Last year, with the S&P 500 up 30% a portfolio so weighed down with diversifiers that the equity portion only went up 5% is a missed opportunity. Lagging a 30% gain, is one thing, missing it is something different, something worse.

In terms of the markets, a scary virus is not new. If this gets worse (markets-wise) then we know what will happen. Markets will go down for some period of time and it might even get to the point of people believing this is different. Then the market will stop going down and start to go back up. I have no idea to what level it could drop or how long a decline might last (in theory, today could be the last day, no idea) which is why sticking to investment process is so important. Sticking to process removes fear from the decision making process which is crucial for long term investing success.

On a lifestyle level, wash your hands diligently. In our fire department we have implemented a couple of simple protocols for medical calls, asking if people have been to China recently, have they been exposed to anyone who might have the Coronavirus and then taking precautions as warranted. I tend to believe these types of scares are more bark than they are bite but that's no reason we shouldn't be prudent.

Serious post today so hopefully a picture of a small dog, sitting on a bigger dog will lighten the mood.

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