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Strategic Insights

Volume 9, Edition 10 | March 9 - March 13, 2020

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Have No Regrets

Doug_Walters Doug Walters | Articles

Read Time: 4:00 min

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Market dislocations are opportunities that can either be capitalized upon or squandered. A sound investment approach built on evidence, not emotion, will help ensure you do not look back at times like these with regret.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko ,

It was a historic market week for all the wrong reasons, as U.S. stocks fell over 16% before bouncing back 9%, ironically on Friday the thirteenth. The impact of the Coronavirus hit home as it became abundantly clear that the near-term economic implications are extending well beyond airlines and hotels. Be it work, school, sports, or leisure, few have not been affected in some way.

While the immediate economic impact is real, and a technical recession appears inevitable, what is less clear is how lasting the effects will be. If mitigation efforts slow the spread, or the timeline to a vaccine accelerates, then a market recovery could be swift. Unfortunately, the opposite is also possible.

For long-term investors, none of this should matter. Those that can rise above the emotion of the past few weeks and execute sound investment principles will look back at these past few weeks as an opportunity that was either capitalized upon or squandered. Here is what “opportunity” looks like to us:

  • Staying invested at an appropriate risk allocation. No market timing.
  • Rebalancing your well-diversified portfolio to prepare for the next rally.
  • Harvesting tax losses where it makes sense to offset future gains.
  • Reallocating assets towards bargains as they emerge.

None of this requires a crystal ball. For us, this is simply our evidence-based, robust, and repeatable process that we execute in good times and bad. It is the Strategic way and will help ensure you do not look back on times like these with regret.

A Squandered Opportunity

We often talk about the risk of marketing timing. There is an overused theoretical exercise we admit to having called upon, showing how damaging it would be to miss the best ten trading days. Of course, it would be extraordinarily unlucky to miss just those best days. But how about a less theoretical exercise? What if this week’s volatility startled you and you pulled out of the market after Thursday’s 10% drop in U.S. equities only to jump back in Monday, having been calmed by Friday’s market reaction to the White House’s press conference? Over a 30-year investment horizon, that moment of weakness would compound into a $700,000 mistake on your $1,000,000 equity portfolio. The moral: set your emotions aside and stay invested at your long-term risk allocation in the good times and bad.

Lost Opportunity

Headlines This Week

Taking charge

  • Trump declared a state of emergency to expedite federal aid for states and local authorities.
  • A self-assessment website is expected to be launched shortly this week, while many retailers will begin hosting drive through testing.
  • Treasury Secretary Mnuchin said the administration would do everything it can to keep the markets open.
  • House Speaker Nancy Pelosi announced an emergency funding that would help those who are affected by the coronavirus.

Global Support

  • The U.S. Federal Reserve announced that it would inject $1.5 trillion to provide liquidity to the markets, helping to stem any concerns surrounding fixed income markets, particularly in the Energy sector.
  • The People’s Bank of China (PBOC) cut the required reserve ratio (RRR) and pumped around $79 billion into banks around China to stimulate their economy.
  • The Bank of Japan (BOJ) announced it would buy ¥200B ($1.9B) of Japanese Government Bonds. The central bank also bought about $1B of Japanese equity Electronically Traded Funds (ETFs).
  • The European Central Bank (ECB) announced that it would provide liquidity if one of the eurozone’s most fragile economies experiences debt liquidation.
  • The Reserve Bank of Australia (RBA) injected an outsized $8.8B into the financial system.

Major Improvements

  • China’s epicenter for the Coronavirus, Wuhan city, reported fewer than ten new cases for the second day in the row. Thursday, the country’s National Health Commission said that the epidemic had passed its peak.
  • Apple is reopening all of its branded stores in China.
  • South Korea reported a declining number of new coronavirus cases as well.

The Week Ahead

The world continues to watch with bated breath as the coronavirus pandemic unfolds.

  • The U.S. is expected to ramp up testing next week in response to criticism about the current lack of availability of test kits.
  • Some estimates forecast the U.S. being able to test more than 10,000 people per day by next week.

The Federal Reserve meets next Wednesday to release its next interest rate decision.

  • Even with their surprise cut this week, they are likely to follow up with another cut to combat the worsening economic environment.
  • There is a range of opinions on the level of any cut, with some feeling a 0.5% reduction is likely, while others think rates will fall to zero from its current 1.00-1.25%.
  • One reason the Fed may not cut to zero is to leave at least some ammunition for the future, should the situation continue to deteriorate.

Economic reports out of the U.S. are likely to take a back seat to the evolving coronavirus emergency but could be impacted by the virus nonetheless.

  • The Retail Sales Control Group report for February details total industry sales and may just reflect the start of the stockpiling phenomenon that currently grips the U.S.
  • Food and Beverage stores (12.8%) and General Merchandise stores (12.6%) make up around a quarter of the total data.
  • Consumers have been exhibiting unique shopping habits lately as the coronavirus has caused many to stock up on groceries, personal care items, and medical supplies.

On a lighter note, St. Patrick’s Day (next Tuesday) and the first day of Spring (next Thursday) can hopefully give people a much-needed reprieve.

 

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.

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