The Coronavirus Correction
Economies are all about mob psychology, and as such a lack of confidence can dramatically alter their course. So here we sit with a tumbling stock market attempting to discount future worldwide earnings prospects over a virus that may prove no more threating to most people than a fairly common flu.
Our current operating premise is that the panic will subside shortly, a matter of weeks, when most realize this is the case. In the meantime, we’ve remained fully invested, though taking advantage of the market volatility to increase some positions and eliminate others.
We certainly expect some short term and longer-term economic impacts. The March and June quarters are likely to be impacted both by demand and supply chain disruptions. But these disruptions will pass quickly. Longer term, we imagine most businesses will choose to de-risk supply chains by sourcing in areas than other than China, and perhaps even doing more in the United States (a lesson that should have been learned earlier courtesy of the tariff wars).
Meanwhile, historically low interest rates in combination with an extraordinarily accommodative Federal Reserve has created massive liquidity in the financial system suggesting to us that the Bull Market will resurrect itself shortly. Moreover, this liquidity in combination with the substantial price declines recently suffered could lead to a dramatic snap back in the equity prices of those firms fundamentally well positioned.
While not necessarily for the faint of heart, we would encourage investors to take advantage of the current correction to scale into positions.