I wanted to give you some of my thoughts on the Coronavirus and the impact on the markets. I think that the government is finally on board with broad efforts to stop the spread of the virus and to provide aid to people and companies most affected by the virus. I am in favor of the current guidelines around social distancing and take a preponderance of care in your daily activities. These efforts to slow the virus should help keep more Americans from getting sick and those that do, the proper medical assistance. This will no doubt disrupt our lives and affect companies possibly for a longer period of time. As evidenced by the slowing rates in China and South Korea, taking drastic efforts now should pay off down the road.
I construct portfolios to match your tolerance for risk and to help generate the most return. However, this is not a “set it and forget it” process. As the risks have increased, I think additional caution is warranted.
Typically, we judge the value of stocks based on the future cash flows the companies generate. There are a number of inputs, but to simplify, we look at the current earnings, the expected growth, and an interest rate to “discount” those future cash flows. Prior to the outbreak, there was relatively high certainty to those inputs; however, In the current environment, the market is struggling to know what any of those numbers are. In addition, the ability of some companies to repay debt is also in question. We cannot rely on past earnings or many companies to estimate their current or future earning power. Furthermore, the risks in the market are raising the discounting interest rate which lowers the value of those future cash flows.
Much of this uncertainty has been absorbed by the market, as the stock market has dropped so precipitously in such a short time frame. However, I believe the virus will run its course at that economic activity will rebound and companies should go back to normal operations and return to generating profits. I think this is a short-term phenomenon for most companies and stronger companies with good balance sheets may even come out more efficient and in a better position to grow. As the market is forward-looking, the market should bottom well before the economy and timing that bottom will be impossible.
This market fluctuations can be unnerving. Please know that I am keeping a close watch of the markets on your behalf. The most important thing is your health, and the well-being of your family, friends, and neighbors. I am available to provide guidance on some financial items like refinancing your mortgage, looking at your budgets and financial plans, and update changes to your estate planning. Otherwise, take the opportunity to do some spring cleaning, work on projects around the house, catch up on some reading and TV shows and take some mental breaks from the news!