Are We Overreacting To The Corona Virus Or Underreacting?

rogernusbaum

A corner of Twitter I'll call critical thinking and probability Twitter has been very concerned about the Coronavirus from pretty much square 1. Early on in this saga I saw other people point out that we should be more worried about the flu because it had (still has as far as I know) killed far more people than the Coronavirus. About all I have said in terms of an opinion, and this was a couple of weeks ago, was that while the number of cases was microscopic, the long and asymptomatic period where people are contagious is concerning. The bit about flu is clearly and obviously a bad read regardless of whether the Coronavirus becomes something truly terrible or magically stops in its tracks in a day or two.

As I type this on Sunday night with futures indicated down about 1% for Monday, I am seeing the conversation within critical thinking and probability Twitter evolve to take on kind of a prepper's feel in terms of having food and the like and hunkering down at home. We probably all saw the empty store shelves in China and I think also Hong Kong and on Sunday pictures started to emerge from Italy of empty store shelves.

Included in the taking it very seriously crowd is Nassim Taleb which will likely lead to a lot of talk about anti-fragility. I think some confuse being anti-fragile with being resilient. Anti-fragile benefits when things go bad. In stock market terms, things don't go bad that often (the stock market has an up year 72% of the time) but of course occasionally they do go bad for markets and long time readers will know I am very motivated to help clients avoid the full brunt of when times go bad for markets.

One Tweet I saw accompanying a picture of a pretty empty store in Milan talked about it being too late to prepare if you're in a half empty store with many other people trying to buy what you can. At a slightly higher level, this sentiment makes sense. Beginning to prepare for something that has already started doesn't seem like a path to a great outcome kind of like waking up on day 1 of retirement and asking yourself, "ok, now what am I going to do?"

Many disagree with me on this but the apparent reaction starting to unfold (a lot can happen between Sunday night and Monday morning, so who knows what markets will do) can happen any time and why I maintain an allocation to gold for most clients with an exchange traded fund. As of Sunday night (so again, who knows about Monday), with equity futures indicated lower, gold is up. The way I always phrase it is that over the long term, gold has the tendency to go the opposite direction as equities, especially when things go bad, it zigs when equities zag. It happens often enough that I maintain a small position. Most clients also own some combination of TAIL and BTAL which also often do well under adverse market circumstances, note that those two ETFs have entirely different strategies. Also a couple of the individual stocks I own for clients historically do well for different reasons in adverse market events.

I have no clue what equities will do on Monday nor do I know what the portfolio will do but in the face of an ugly day for the S&P 500 I would hope that the portfolio goes down less than the market which I think of as resiliency as opposed to going up in a chaotic day which I would think of as anti-fragility. If you accept that equities are the thing that go up the most, most of the time then you want your portfolio to look like the equity market to some extent...most of the time. We're still a ways from breaking most uptrends for the S&P 500 so for now we're still in the range of normal, equity market volatility and normal, equity market volatility goes with the territory of participating.

No matter what your investment process is, the Coronavirus is not a reason to bail on it. My process involves taking defensive action when the S&P 500 crosses its 200 day moving average. I don't know what will cause the next 200 DMA breach and in terms of process, I don't care. It will happen at some point and I will act accordingly. No matter what your process is, stick to it.

Comments