2 Weeks, 2 Months, 2 Years
Investors generally don’t like uncertainty, and the novel Corona virus has brought a completely unexpected shock to the markets. As many investors struggle with the rapid sell off and increased volatility, we suggest looking forward 2 weeks, 2 months and 2 years to bring some clarity of possible outcomes, to help ease anxiety and to take opportunistic advantage of today’s discounted equity valuations.
For the next 2 weeks, we will likely all continue focusing on safety and security. Tacitus, the Roman historian, commented, “He that fights and runs away, may turn and fight another day”. We think this is sage advice, not only for short-term physical safety, but also when crafting a financial plan. In our opinion, any financial plan should begin with at least 6-12 months of cash or near cash liquidity, which we see as a necessity to weather short-term volatility and the unexpected. While we generally do not pontificate on what the markets may return over a 2-week time horizon, we do expect the economic data to worsen dramatically, driven by forced shutdowns of many sectors of the economy. As an offset, we believe the Fed’s dramatic liquidity and lending programs should keep markets liquid and the economy functioning. The pending fiscal stimulus, likely approved shortly, should also provide significant support for workers and impacted industries. If investors have short-term liquidity of 6-12 months set aside, we see no reason over the next 2 weeks, to alter a well-crafted long-term financial plan. Instead of a panicked reaction to short-term news and market action, we recommend long term investors take a forward-looking mindset and opportunistically accumulate deeply discounted equites.
While a complete medical victory over the virus is highly unlikely in the next 2 months, investor clarity will almost certainly improve. The medical community should have greater insight into how to manage the pandemic. The medical industry will likely have ramped up production of essential supplies to fight the virus, including masks, gloves, respirators, etc. This tangible progress should reduce fear and uncertainty and bring greater clarity to investor expectations for the future. Over this time frame we expect to see the first signs of economic recovery for the affected parts of the economy, or “green shoots.” While these early signs of recovery will be welcomed by investors, this reduced uncertainty and greater visibility for where things are headed will likely end the period of extreme equity discounts. If investors wait for these tangible signals, they may risk missing today’s discounted opportunities and will likely be caught up in the herd of investors rushing to rebuild equity exposure. We recommend investors think of what’s to come over the next two months, but act over the next 2-weeks before the roadmap is clear.
For investors worried about the risk of investing amidst the uncertainty, we recommend looking farther out on the horizon. In 2 years, we expect a full medical and economic victory over the novel corona virus. The medical victory will likely consist of vaccines and short-term therapies to lessen the impact and duration of an infection. This should allow the full recovery and unrestrained operation of the global economy. From this view, we believe the investment risk in companies with strong business models and well capitalized balance sheets is fairly low. The highly discounted stock values we see today will likely be a faded memory. Those that choose to invest over the next 2 weeks with vision vs. clarity should be very pleased with returns.
Our investment philosophy has always been designed to focus on the long term. Downside protection in the strength of both a company’s balance sheet and business model are imperative in our investment process, for the reason that the long term always will have short-term periods of volatility. While the novel Corona virus crisis is an extreme period of volatility, we think the benefits of designing and sticking to a long-term financial plan that can withstand, and capitalize on this and other periods of volatility, will reward investors over the long term.
All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.