The coronavirus, gripping the fears and attention of the world, has now caused the biggest weekly market sell-off since the Financial Crisis. We have now reached the point where we are beginning to see indiscriminate selling across the board. Investors have pulled out over $22 billion from stock funds and ETFs this week. Defensive stocks that were holding up better earlier in the week have now been thrown out with the bath water as investors are just moving to cash at all costs. Two measures we look at to understand investor panic are the Put/Call Ratio and the VIX, don’t worry if you aren’t familiar with either specifically. Their relevance for us is only to see they are both approaching “oversold conditions”. The same oversold conditions we saw in the 4th quarter of 2018, which ended with a –14% decline. Does this signal a bottom? Not yet since we need to see evidence of how stocks perform during rallies to confirm the bottom. In many cases rallies eventually retest the lows and at that point we can make a better assessment of the direction in stocks.
We saw the Treasury markets signaling underling issues well before this decline in global stocks. The Credit markets are still signaling more stress as high yield bonds, preferred stocks and distressed Energy credit are seeing spikes in yields relative to Treasury’s. However, they are not near the extremes we saw during the Financial Crisis. Central banks across the globe will likely step in to provide some liquidity and we’ll probably see interest rates fall in the US. This could even be a positive for the housing market as interest rates in the US are at all-time lows which may spur some refinancing and home purchases. However, no matter what impact Central Banks have on financial assets, this does not cure patients that are infected with the virus. We do not know how quickly the virus will spread across the globe and how it impacts local economies. There is evidence the outbreaks in China are slowing as cases are rising in other countries.
It is impossible to predict the ultimate impact the coronavirus will have on our personal lives, our job security and our retirement balances. However, at times like these, we are reminded what sort of risk tolerance we all have to shocks and volatility. At the Popovich Financial Group, we believe in having a diversified portfolio with a long-term investment approach. We try to achieve long-term growth of the portfolio with high-quality domestic stocks. Companies that we feel have track records to weather the storm. We invest in high-quality fixed income to provide diversification that is welcome in times like these. We will look for opportunities to add to companies that are on average 10-15% cheaper than they were this time last week. It is important to be reminded of very simple, but sage advice from Warren Buffet. “Be fearful when others are greedy and greedy when others are fearful.”
Please continue to wash your hands often and use your own common sense. We will allow the doctors and scientists to fight the virus while we will diligently watch the economic reports, corporate commentary and market conditions. Thank you for your continued support and please call us if you feel the need for further discussion.