Pandemics and panics - what are we doing about it?

We are already positioned cautiously because markets are (probably) quite expensive. We have noted how many other low conviction long equity investors are waiting beside the fire exit. So should we get off the equity bandwagon ahead of (or during) the rush? Frankly, we are not sure and we don’t think it’s time to fight the Fed.

We have heard from various sources that sustained growth rates in confirmed cases of the virus above 20% are cause for serious concern while rates in the low teens would point to something more manageable. The last few days we saw those levels breached. While it was probably inevitable that we would see an initial ramp-up in cases as the focus moved from Chinese containment to global coping, the media in the Western world has reached fever pitch levels in the last few days. What we don’t know is whether this is another set-back that will ultimately be seen as a buying opportunity or the straw that broke the back of the global economy.

In fact, we can’t even be sure that it is just the Coronavirus that has caused the recent falls in markets (bear in mind that while media headlines make for compelling narratives we still don’t know with absolute certainty what caused the 1987 crash thirty-three years and many books later). One compelling reason, or contributing factor, for recent market turmoil, is the polling of the Democratic Nomination in the US where Bernie Sanders’ standing jumped markedly in recent days vs the more market-friendly Joe Biden. Compared to the unknowns of the Coronavirus, the economic impact of a Sanders Presidency is relatively easy for markets to discount (given the prevailing assumptions of most market participants).

It is, of course, early days in this race but in this respect Bernie has form. It is highly plausible that the last time the US felt the ’Burn’ was not a particularly market-friendly environment, and that was before the world had really contemplated the possibilities of populist policies. This reminds us that markets are volatile precisely because they quickly discount future scenarios, that may or may not happen. Sell the rumour buy the fact?

The market has also spent much of the last 30 years making life difficult for asset allocators and forecasters. The market has fallen by 5% or more 27 times in that period. 12 of those happened during a bear market but these occurrences were concentrated within 5 years (2000-3 and 2007-8). The rest of the time they proved to be feints that left many hapless investors whipsawed and wrong-sided on both the fall and the subsequent rebound. Of course, the time will come (possibly quite soon) when it becomes apparent that we are deep into something bigger but in our view right now there is simply not enough tangible information to convince us to become more defensive than we already are. This is a subjective view which we discussed this evening with Andrew Hunt, who we consider to be more ‘plugged-in’ than ourselves. He too remains on the fence but, absent any further developments, awaits data from the US Federal Reserve on Friday which should reveal the extent to which the US central bank is willing to support markets in the way that the People’s Bank of China evidently has been recently.

The markets continued their wild swings overnight. Europe plummeted and then mostly recovered while the US then opened up and retraced its steps later on. At times like these, we find these multi-day/intra-day charts useful in interpreting the swings in sentiment and how they shift across the globe. In this one, it is interesting to note that Asia has started to be strangely resilient when compared to the early part of the month. Maybe the focus is shifting to how the Coronavirus will affect the Northern Hemisphere and the West. Or maybe it has indeed more to do with what is happening in the US, or at least the sentiment of US investors?