SUMMARY. This week marked extreme panic over the spread of the virus from China throughout the world with cases increasing in South Korea, Iran & Italy to name a few. Further several large companies like Microsoft announced the virus will impact earnings in 1Q and possibly 2Q20. As the spread continued so did the panic as the week wore on. Below (courtesy of CNBC as of 2/28/20) is the VIX index which is generally regarded as WALLSTREET's "fear" gauge. Notice the extreme spike this week which marked the highest level since the financial crisis in 2009. This fear was born from the concern that the virus would throw the world economy into recession as both demand and supply get disrupted. Notice how the index spiked to similar levels in other periods and fell thereafter as "fear" peaked. These spikes correspond to periods of very high market volatility and uncertainty with market sell offs. The point is these extreme events come and go and although we can't predict how long they can last history says when the VIX gets to extremely high levels it may correspond to peak in "fear".
INVESTMENT IMPACT. Conservatism still reigns across our model portfolios (equity levels generally lower than targets), however we maintain the virus impact will be largely felt in 1H20 as economic growth resumes in 2H20. As a result, we have INCREASED our equity exposure in our model portfolios significantly in high quality, value oriented high dividend stocks. In addition, we cut our bond exposure given low yields opting to switch to higher yielding assets such as preferred stock which has lower volatility vs equities but higher yields vs bonds. We believe market volatility will continue UNTIL progress is demonstrated with trials with existing drugs or vaccine break through. This maybe be pivotal in determining the direction of economy. Markets may care less on the timing of availability of such "cures" vs their efficacy. Our overall our view is the impact of the virus may push out growth into 2H20 and additional stimulus from central banks may mute its long term impact.
For more insights see our website and disclosures found there at BCA. As always contact us for further explanation of how these events can effect your finances.