Our Views of the COVID-19 Impact
Please recall the note we sent out a couple of weeks ago. At the time we wanted to review our thoughts on the market declines associated with the coronavirus disease 2019, a.k.a COVID-19. Since then our views have changed slightly in two important areas; 1) the market impact is now more significant than we expected (markets down -20% at worst so far), and 2) we feel the recovery time could be longer than our original three to six-month estimate. Our new estimate is six to nine months, with an outside chance of a full year.
What hasn’t changed is our feeling that this has been an event driven market condition. Financial markets hate uncertainty and COVID-19 has provided plenty. For example, will corporate earnings go down and drag the markets further down? Will the trade effects coming from China and other countries lead to a recession in the U.S.? Will the COVID-19 mortality rate have sufficient impact to become a pandemic? There is no way to answer these questions definitively, and so, the markets see risks that can’t be resolved. And the reaction has been dramatic.
Our Job in Managing Portfolios
Our job in managing portfolios is to analyze and evaluate market conditions and make what we feel are the best investment choices. Looking more closely at those three questions, we believe corporate earnings will go down for the next two quarters. Some of that drop in earnings will be exactly because of the trade issues created by COVID-19. However, we feel countries like China and South Korea are experiencing a reduction in the rate of new cases and thus the containment efforts appear to be working. Further, we believe the underlying economy in the U.S. is strong enough that those two quarters of reduced earnings will not spiral into a recession. As earnings drop over the next two quarters we will continue to see market gyrations, both up and down. Our plan is to make trades and buy equities at reduced prices when we feel more confident we’re at or near the bottom of this correction. Our expectation is that these trades have a good chance of producing gains within a year’s time. The markets are panicking, but we aren’t. Our timing has changed since last note, but our overall sentiment remains.
That last question about COVID-19 mortality is trickier, but our research is part of the reason we aren’t panicking. Coronavirus’s aren’t new and the medical community has a reasonably good understanding of them. Scientists currently view COVID-19 taking one of two paths. The first is that it evolves to be less lethal and becomes just another “common cold” virus (most colds are caused by viruses). The second is that COVID-19 maintains its lethality and becomes the newest version of a seasonal flu. The scientific community does not expect the virus to mutate in a way where it becomes more lethal. We believe once the containment efforts become more accepted, and the mortality rate is viewed as less threatening, the pandemic fear will subside and the recovery will begin.
We hope this note helps explain our position on the recent market moves. Please feel free to contact us with questions or for further discussion.
Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.
This newsletter is for general information only and should not be considered investment advice. Investors should consult with a trained investment professional to discuss their particular situation.