The Market: March 2020

First, before any commentary, it is important that, while this newsletter deals with dollars and cents when discussing global crises, we keep in our minds and hearts the human cost, difficulties, and sometimes tragedies that go along with events.

Coronavirus infection rate will continue to rise

We are not experts in health or politics.

We have some insight into how investors behave and how investments may be priced or mis-priced.

It’s apparent that the Coronavirus infection rate will continue to rise. There is little doubt that the measures to contain the virus such as working from home, closed facilities, canceled events, and a general sense of caution will have a negative impact on the global economy.

This is not to say that these measures are not correct and necessary, it is just a fact.

Markets discount the impact of events before the actual numbers appear. The decline in stocks and corporate bonds is the market discounting future negative economic news.

The question is whether these markets have discounted enough or is more to go. I might suggest that the markets may have priced in one to two quarters of flat to negative economic growth.

If the contagion lasts longer, the economy will be in a slump for longer and I think the markets will have to continue to adjust.

Fear vs. Greed

During these conditions, the two preeminent competing urges that are present in the minds of investors are at their peak.

One is fear.

The other is greed.

One can make a case that investors should sell everything and wait for the virus to dissipate. The correction in stocks we’ve had could easily become a 40% bear market.

Conversely, many stocks have fallen sharply and now have low P/E ratios and/or high dividend yields.

As Warren Buffett likes to quote from the book Reminiscences Of A Stock Operator,

“be greedy when others are fearful”.

I think there is a middle path.

Market declines are a chance to evaluate a portfolio.

It’s hard to sell everything. You may need the income. It’s also impossible to come back in at the bottom and you could miss a big rally when the coast is clear.

What may work is pruning the portfolio – selling positions you really are “so-so” about and trading up to better quality names. Buy the stocks you always wanted to own but you thought you missed them.

Smart investors focus on the long-term. Taking a short-term loss to buy shares of a company that will work for the long haul makes sense.

Investors shouldn’t panic but rather occupy their minds with the idea that they are being strategic.

Asset allocation should also be addressed. Are you over-weight a sector or an asset class?

Make adjustments but don’t, in a panic, change your long-term investment plan unless your needs and goals have really changed.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.