My Thoughts on Market Risk and the Coronavirus

I woke up this morning with an email from a person who I spoke with a few months ago about his investments. He is not a client but wants my advice. I have decided to share his concerns and my response because I believe it accurately reflects my thoughts on the market. For what it is worth, I believe many of you probably have similar concerns so I hope this helps in some way.

Here is his email and I am paraphrasing to maintain his anonymity and not disclose personal information:

Craig,

I realize that you are not our advisor and I am reaching out to you out of respect of your knowledge and how you look at the markets. While we haven’t done terribly in the current volatility (down about 6% of our holdings) with our current advisors, I am simply looking at your basic take on the market and where it might be headed. It is so volatile and everything I’m reading from respected firms such as Goldman Sachs and JP Morgan-Chase indicates they don’t have any idea where this is heading, which concerns me greatly. Our advisors have us positioned with Tactical Managers (Name Omitted), Bond Funds (Name Omitted) and some diversified funds with (Name Omitted). We have met and spoke with them extensively over the past week and they are comfortable (as of Friday) with these current allocations. All have weathered the storm fairly well.

What I was hoping was to see if you have any insight on this volatility? I follow your newsletters and was happy to hear you were doing well for you clients. I am feeling very uneasy about the current trends and while I’m not totally dissatisfied with our current advisors, was hoping for a brief take on things from a trusted source.

Our current firm is advising on riding things out allocated as depicted below:

(Allocation Omitted)

While I am not unhappy with our advisors, I am not against making a change. While I realize now is the worst time to try something like this, I would appreciate your input on how we are positioned and what you may offer that is different in this tumultuous market.

My Response:

It is really good to hear from you. Most importantly, I hope you guys are well and safe. This pandemic is more serious than most people realize and the fact that our elected officials continue to lie and downplay the risks has me worried about the well-being of our aged and health compromised citizens. My parents are older and my father has pulmonary fibrosis which means if he catches the virus he is more than likely dead. That being said, our family is not leaving the house except when absolutely necessary. I may be overreacting, but when you analyze risk you have to look at the odds of that risk playing out (most current projections are estimating 40-70% infection rates) and what is the downside. Here the downside is death, so being overly cautious is how our family is handling things right now. Of course, given we are relatively young and healthy, our risk of dying is very low. However, I would not want to give this to someone in a higher risk category, like my parents. We will know a lot more about the health risks in about 3-4 weeks. Again, I hope you guys stay out of harms way.

That being said, I went back and looked at my notes from our appointment and I said in our call that I did not believe that your current money manager was “actively” managing risk. If they were, they would be communicating with clients the result of their market analysis and how they were allocating accounts based upon the results. The fact that they are not suggests that they are using a buy-and-hold strategy.

We are in a bear market and I believe the odds are very high that we are headed for recession. Historically, the largest stock market drops occur during recessions. My client accounts are now 100% cash with gains of about 2% year-to-date (for both our conservative and aggressive models as of 3-13-2020). It would be irresponsible of me to recommend what you should do now, given I am not managing your money. There are numerous reasons why I say this. For example, if I suggest that you sell all your stock funds to protect your capital, I don’t know if your current advisor can get you back in at a time that would make the move beneficial. They not only have you fully invested but are also saying that the risk is low enough that you should stay put. If they are not recognizing this risk, then what are they looking at?

The bottom line is that you need to decide if you are comfortable with staying with your current allocation through this market downturn. Based on what you have shared with me, that is your advisor’s strategy. If not, lets set up another phone appointment and we can discuss this in more detail.

Again, I hope you guys are well. Please feel free to continue to stay in contact with me.

Sincerely,
Craig Thompson, ChFC

If you want more detailed information on my market analysis, please review our last two market updates: Stock Market Looking Frothy and The Long and the Short of It.

If anyone has questions or concerns, please feel free to contact me. Take care and be safe.