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Optimistic portfolio management in scary times

Mar 07, 2020 | Jeffrey Ball


Although it’s clear that the coronavirus will impact the economy, history has shown that fear should not drive your investment strategy.

Business man walking beside tall buildings in the city.

Lions and tigers and bears were the iconic threats to Dorothy and her friends in the Wizard of Oz. In 2020 we are frequently reminded of the imminent threats of terrorism, war, political chaos, and natural disasters.  As if human suffering, death, and destruction isn’t bad enough, any one of these threats can derail the stock market and threaten our retirement savings as well. I put the coronavirus (COVID-19) in the category of natural disasters. It is a truly scary world these days. I have had to ask myself, “Is there a silver lining in all this gloom and doom?” 

I could get philosophical and wax poetically about gratitude and abundance, but I will stick to economics and finance today. The good news is that the U.S. and global economies are surprisingly healthy in spite of the existential dread that many people are feeling these days. The health and stability of the global financial system was tested in the financial crisis from 2005 to 2009. Our global banking industry is widely believed to be more stable, far better capitalized, and better regulated than a decade ago. 

  • The domestic and foreign economies of the world have been growing steadily, with no threat of recession;
  • Long-term economic growth and stable low-interest rates are conducive to profitable investing in stocks and bonds; 
  • Recent economic growth may not be robust but unemployment is low and the growth has been consistent; and 
  • Economists and investors have been optimistic and the U.S. stock market was making new all-time highs right through mid-February.

Then along came the spread of a global pandemic with no signs of slowing. Many economists now expect the global slowdown to result in a corona virus-induced recession, which will produce some shockingly bad economic statistics. The disruption is expected to be temporary, but the magnitude to be profound. Manufacturing supply-chains will recover once the spread of the virus has been contained, but it may be reasonable to fear the worst. If the spread of infection continues into the second quarter of the year, then the economic impact will be much greater. Right now, you may be saying, “Ok, Jeff – what’s the good news?” 

The good news is, that the long-term health of the economy should not be impacted by the virus. In fact, most of the human tragedies and events that can cause seismic shifts in stocks don’t change the long-term macroeconomic trends that drive stocks and bonds. Global disasters cause human suffering but frequently stimulate government spending and economic growth. Once the coronavirus is contained, our economy should recover fully. Neither terrorism nor tragedy, not even government dysfunction and impeachment have hurt our economic growth. The problems of poverty, racism and extreme wealth inequality are powerful concerns, but they generally don’t affect stocks and bonds. (I over-simplify, but you get the point.) 

So, in this polarized presidential election year, most Americans are anxious about the future. I am not saying that everything is ok. I am just saying that while it is reasonable to worry about the infinite threats to human health and safety, we probably worry too much about the risks of market bubbles and crashes. Every rally is not a bubble and every pullback is not a crash. The stock market, the S&P 500, GDP growth and corporate earnings are not a “vulnerable demographic group”, and our economy is likely to remain on a steady growth track – after the coronavirus is contained. 

Conclusion: Be concerned about the future, and have modest expectations for stock market returns, but don’t let fear drive your investment strategy. Our economy remains relatively healthy and stable in spite of politics and everything else going on in the world. If you’d like to discuss your investment strategy and how I can help you reach your goals, please contact me today.