The start of 2020 has been a wake-up call for the world.
It’s been a little over a decade since the World Health Organization and governments were last put to the test with a global pandemic. We’ve reviewed research reports about the impact of COVID-19 on supply chains as well as the potential human toll. One thing is clear: SARS and MERS are not good benchmarks for this latest outbreak, but they are logical comparisons. From a market return perspective, SARS hit at the bottom of the tech bubble after valuations had already been crushed for several years. Now, the markets have never been more expensive and that is where the risks lie.
There is certainly more volatility expected in the coming months. Beyond fears of a global contagion, the risk of a change to the US Presidency is not priced into markets. For investors, the past decade has offered very few opportunities to stress test their portfolios’ defensive capabilities. And now, almost overnight, the long period of complacency has given way to an environment of uncertainty. As I’m writing this note on March 12, 2020, the S&P 500 has lost over 21% quarter-to-date (QTD), with the Dow 30 down over 24% QTD.
History has thought us that preventive measures generate more favorable results compared to reactionary measures; the same can be said of investment management. We’ve been concerned about market risk for a while, so we’ve tilted portfolios to reduce downside risk using our options hedging strategies, among other adjustments, resulting in our client’s investments being protected during this downturn, while many other investors are experiencing fear and panic.
For readers interested in a bit more of a technical discussion about the current markets, you might find my February 28th 2020 blog post interesting – you can find it here.
Ultimately, clients hire us to grow their capital during positive cycles and preserve their assets during turmoil. If you would like to discuss how we could manage your portfolios during all market conditions to generate higher risk adjusted returns and sleep better at night, don’t hesitate to reach out to us. If you’re a financial advisor and would like to receive my WLC Research reports published every 10 days or so, please contact me.