SUMMARY. Having investment experience through 3 major bubble collapses may provide perspective on recognizing fear or emotional based selling vs fundamental based selling (based on real economic activity). Fear of the unknown (spread of the virus) and its impact on fundamentals is likely driving emotional selling that is unfolding in the markets currently. The further "shock" of Saudi Arabia (which we did not foresee) INCREASING oil output, crashing oil prices, has further fanned the fear of an economic recession turning into a financial crisis. WHO today declared the world in global pandemic further stoking fears and the result is obvious. As we mentioned in prior letters containment was never a likely solution to reduce fear and you see this playing out as the media headlines increase about the virus spread. Volatility may continue to be driven by headlines not fundamentals which we can't predict.
INVESTMENT IMPACT. Its our view that what is unfolding volatility wise in the market is emotionally based on fear. Its hard to predict changes in emotion and how long fear will last. But based on experiencing 3 market corrections tied to bubbles over the last 30 years we view when fear based selling ensues market stability may not be far off. However, there needs to be a catalyst to reduce fear. We continue to believe that the spread will continue and containment will unlikely occur. Thus, we are focused on progress on the drug front which may change sentiment lifting the cloud of uncertainty beginning next month or sooner. Further, central bank actions to boost growth may also play a role in coming weeks or days. At his point we are only making minor changes to portfolio allocations keeping equity exposure steady looking past the near-term volatility into a better environment in second half 2020 for accelerated economic growth. To be clear, our outlook for better growth ahead has not changed as media driven fear has increased near-term. Further, we are focused on positioning portfolios for better growth ahead and what assets will benefit vs the current environment. Remember, market bottoms occur when things look bleakest either emotionally or fundamentally depending of the nature of the selling. The assets one owns today may not be the ones to own in the environment to come so the key is to figure that before the future becomes apparent and being positioned correctly. We are more focused on this point vs timing the market or day to day market swings.
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.