Here we go again.  Another day of fear, prompting yet another steep sell-off in global stock markets.  Here is our take on the situation:

  • Unlike the 2008 Financial Crisis, the current episode started as a public health issue not an economic issue.  Global authorities (starting with China) have decided that COVID-19 is sufficient enough, as a threat to the general public, that extraordinary measures are required despite little hard evidence.  This is not anything like 2008.
  • Well-meaning but extremely restrictive measures are now making this an economic issue.  As governments and corporations have shut down society, economic activity has come to a standstill.  GDP and profits on a worldwide basis will be negatively affected.  This is what is giving the stock market fits.
  • The real issue is “how long” is this going to last.  In the absence of any kind of certainty, stock markets tend to discount in bad outcomes.  Since February 19th, the last normal trading day, stocks as an asset class, have declined by approximately 20%.  This discount allows for a lot of bad news.
  • Historic “Panic” Indicators seem to be running out of steam.  The CBOE Volatility Index (VIX), often quoted as the “fear gauge”, has shot past recent bouts of panic including 2011, 2016 and 2018.  While the VIX does remain below 2008 levels – see our first point.  Typically, the VIX peaks and begins to subside prior to a “relief rally”.  Similarly, gold bullion prices, while higher than year-end levels, remain rather tame given the alarming tone of the media.  People can’t stay in high anxiety for long.
  • Bonds do not offer lasting shelter.  North American 10-year bond yields have fallen below 1% offering meagre “real” returns in the future.  Tactically bond allocations have helped but strategically they offer very little.  They will be a source of cash on rebalancing.
  • The safest harbour: global balanced portfolios.  A mix of fixed income and global equities offers the best combination of downside protection and eventual upside capture.  While global equity markets have declined by 20% in the last three weeks, a 60/40 benchmark portfolio is down approximately 10% and will benefit from the coming rally.
  • Market timing doesn’t work but rebalancing does!!  It is nearly impossible to time a market rally but the process of rebalancing – reducing fixed income and buying equities – always works.