Market Commentary
“Despite all our medical and technological breakthroughs, when confronted by the prospect of an epidemic, we are not that different from a farmer in an ancient Sumerian settlement making offerings to a local fertility deity so that he might survive the mysterious pustules killing everyone n town.” Karl Taro Greenfeld writing for The Atlantic about the pattern of human response to “epidemics”.
We are aware that fear and panic is permeating the air these days. Currently the financial markets are a tangible sign of this fear and panic. The VIX is spiking, equities are falling, and bond prices and other “safe haven assets” are surging. But short term spikes in the VIX and flights to safety are not a reason to panic in and of themselves. They are simply a reflection of the panic in the market. Panic happens often, but we are conditioned to forget the previous panics and say that “this time it is different”. We do not know that it will be different this time, but we will not have a panicked reaction to the markets. Panics can end overnight, and then normal market conditions can return. Not reacting in panic is not an easy position to take when the world around you is reacting just that way. There is always a reason to panic on the horizon. We cannot invest in fear.
And so we end this tumultuous week in pretty much the same situation that we ended the last tumultuous week. The S&P 500 is +/-X.X% this week and still down -X.X% from the all time highs of February 19th. Meet the new week, same as the old week. We took an initial step into lower volatility equities at the end of last week without reducing any of our positions sizes in our Tactical Asset Allocation models. Some of our quantitative models have taken defensive positions as well. We have updated the chart we shared last week as an illustration of the usual resolution to market drawdowns.
Parsing the difference between pre and post COVID-19 numbers is going to become all the rage. We should all do a bias check on every article that we read. Is the article biased? Why am I reading this article, to confirm my viewpoint or to challenge my viewpoint? If I disagree with this viewpoint of view am I taking its thesis of the article seriously?
We are seeing the dismissal of good economic data such as most recent jobs report as “pre-virus” numbers. Be wary when commentators dismiss all contrary facts to their argument to make all normal economic indicators worthless because nothing is taking into account the virus impact. Nobody really knows the virus impact. It could be much smaller than anybody anticipates or much larger. We could end up with an L shaped recovery, or a V shaped recovery, or down further from here. We focus on price movement because at the end of the day that is all our clients really care about. Speculation is not our stock in trade.
We do not like seeing volatility in the market. +4% days like Monday may feel good, but volatility is not what we want to see. Markets moving up too fast is not a healthy move. We hope that the nervous sellers have been washed out at this point and we can get a rational response to the actual threat posed. We are prepared to take further defensive action if the market continues to move down.
If you have any questions about our response the these markets please give me a call.