Panic is not a strategy
Whether you designed, implemented and are currently monitoring your own investment portfolio or are counting on somebody like Fagan Associates to do the same, keep in mind that it should have been set up in anticipation of tumultuous weeks like the one that just passed.
Your strategy should have been already put in place, with just these weeks in mind.
Candidly, we have been quite surprised that not only the U.S. financial markets but also those in China and other foreign markets had held up so well since the outbreak of the coronavirus was first made public around the middle of January. Despite the record high in the S&P 500 on Wednesday, February 19th, we have noted over the past FIVE WEEKS within our website as well as on our weekly Fagan Financial Report that “we are sticking with our belief that if past contagions are any indication of how this one might play out there is some risk to the downside to the tune of approximately five to ten percent.
However, we believe this would be temporary and therefore a buying opportunity as fundamentally, the economy remains on sound footing.”
That said, we certainly are surprised at the depth as well as the ferocity of the pullback thus far and would not be so arrogant as to attempt to call a bottom. Now let’s look to what might enable the stock market to reverse its recent course. Right now, like fighting a wildfire, it is all about containment. One cannot talk about ending the spreading of this virus until it can be determined how it originated and until there are many more individuals recovering from it rather than contracting it.
As of now, neither is occurring.
What to do. Keep in mind that panic is definitely not a strategy. Corrections and bear markets are caused by either flawed monetary and/or fiscal policy or from an external catalyst like the coronavirus. Historically, externally generated pullbacks are swift, hard hitting – and in hindsight, buying opportunities. We believe this is not another 2008, a year in which stocks plummeted nearly forty percent.
That bear market came as a result of flawed housing and monetary policies as well as a lack of appropriate regulation of our banking systems. It was spawned right here in the United States. Those tend to be deep and longer lasting.
Compare the current value of your investment accounts to where it was one, two and three years ago. It is natural for investors to have wanted to lock in some of these profits. The coronavirus is the perfect catalyst.
We recommend that investors use this weakness to sell their peripheral and weaker holdings and reinvest the proceeds into those which they have the greatest degree of confidence. Work at the margins all the while keeping your asset allocation intact. However, if you feel you must raise cash to deal with this environment, start with five percent and then work from there on a weekly basis.
Supply chain interruptions will eventually become an issue and will only be rectified when the virus is contained. These supply chain interruptions will ultimately reach our shores and manifest themselves in weak corporate earnings. The question is, from what level will an investor look past this to the other side and begin to see the potential for improvement in the economy and therefore a resumption of earnings growth.
Historically, this is within ten percent of current levels. Ultimately, we believe that TINA (there is no alternative) will once again emerge and will benefit the stocks where the selling has been random and nondiscriminatory. For us, this includes companies like Apple Computer (AAPL), Visa (V), Mastercard (MA), Amazon (AMZN) and Microsoft (MSFT), etc….
We believe that stocks are well on their way to pricing in a pretty extreme outcome and would encourage the readers to focus on the long-term, keeping in mind that the financial markets can be both risky and volatility over the short-term, but neither risky nor volatile over the long term.
After having initially underestimated the impact of the coronavirus, it now appears that investors are well on their way to overestimating it.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 2791044.