Your Life Simplified

Coronavirus Infecting the Market? (22:19)

March 9, 2020

With drops in the markets over the last two weeks and the spread of the coronavirus, you may have concerns about your investments. We continue to watch the markets and urge against taking impulsive actions. Hear what our Chief Investment Strategist Jeff Krumpelman has to say on the topic.


Scott Sturgeon: Welcome to a very special edition of Your Life, Simplified. I’m Scott Sturgeon, I’ll be playing host. Our guest for today is chief investment strategist for Mariner, Jeff Krumpelman. Jeff, thanks for coming on the show.

Jeff Krumpelman: Thanks for having me, Scott. Appreciate it.

Scott Sturgeon: Absolutely. So, really Jeff the point of our conversation today, you saw it on the headline for the episode, is all about coronavirus and specifically a lot of market fluctuations and some of the headlines we’ve been seeing a lot of it, very pessimistic. I hate to say fearmongering, but it seems like it’s potentially kind of a scary thing out there. So we wanted to sit down with you for a few minutes and get your thoughts on what was happening and where you saw things going. It’s been a chaotic couple of weeks, and I think maybe the prevailing thought is that’s likely to continue. Could you maybe just give us a view from 35,000 feet of what you think is happening in the markets and just in general with the virus?

Jeff Krumpelman: Yes, sure can. It has been extremely volatile and is being advertised as, last week that is, the worst week in the history of the U.S. stock market, and I think that’s a little overdone. I think that captures this negativity that you’re talking about, because we did have the quickest 10% correction in the market in history, but when you look at all the different corrections that we’ve had, there are a number that come very close to being this rapid. And there are others that are far deeper. You know, you overshot and went down far more than 10% and just a little longer period of time and 1987 comes to mind where you had a 22% correction in just one day. So, I think it’s a little overdone and captures the negative sentiment out there and to advertise this as the worst thing that’s ever happened, the worst week ever on the face of the planet. Going into the year I penned a piece about 2020 and suggested – stealing a little bit from a Wall Street Journal article – as a new year’s resolution, say no to negativity in 2020.

And the article talked about how we just have this negativity bias. We tend to go to worst-case outcome on everything, whether it’s coronavirus or trade or what have you. And I think that last week that’s what people did. They just assumed worst-case outcomes. And the executive summary, and I’m happy to do follow on, is that we really do lean towards thinking this is a buying opportunity. We hate to see a correction that’s connected to health issues. It’s being managed, we think, based upon the data we see out of China. In terms of the underlying fundamentals of the economy and the markets, we see them as remaining positive. We were outrageously bullish in 2019, when people were similarly negative and running to worst-case outcomes on things like trade rhetoric. We remain positive going into 2020, not as outrageously positive as we were in 2019, when valuation was a little more attractive, but we think that this is a transitory issue that we’ll work through and that the market will be up and positive for the year. So, we view this as a normal correction quite frankly, albeit, whenever you’re talking about health-related issues, fear might be just a little bit greater, but we see it as a normal correction.

Scott Sturgeon: Sure. Pulling from some of the content I’d seen you circulating internally here at Mariner, something to the effect of, corrections like this are part of a healthy normal market cycle, that we had been a little bit overdue for one of these. And, as you mentioned, you never want it to be a health-related issue, but at the same time, it’s maybe just part of the cycle, and it’s to be expected over the long term.

Jeff Krumpelman: Yes, absolutely. And it is healthy. I love to pull out the chart that shows that 80% of those years going back to 1980 are positive. So, it pays to be optimistic, about the U.S. stock market. You can get negative, but you better get negative only when the data takes you there. We don’t think that data does take you there. So this is normal. And after being up 31.5% in 2019 and getting off to a very good start to this year, we needed a little respite. We needed a pause. We didn’t think it would be coronavirus. We thought it might be just handwringing over speculation about the presidential campaign, maybe fallout from impeachment and just negative rhetoric coming out of that, it could have been geopolitical. We had Iran and stuff like that in the beginning that was unnerving folks. So, we just thought something would cause a calm or a reset in the market, and it happens to be coronavirus. But the other point that I want to make here is that we try and do a very good job of distinguishing for our clients, the difference between the signals you see of correction versus the signals the economy is giving you at a bull market top. And around corrections, they tend to be psychological adjustments. Sentiment turns negative because some wall of worry issue like the one we’re dealing with. That’s very different from the true economic signals that come at you when things are really slowing down at bull market tops. So, examples of that might be, if this were really the beginning of the end, and we were returning to a bear market, we would expect to see surging unemployment.

Generally, unemployment claims surge 10% or more in short order. The unemployment rate spikes, consumer confidence plummets, earnings begin to really fall off a cliff, so to speak, and the credit markets freeze up. Very importantly, spreads widen and none of that, and let me repeat that, none of that is happening right now. You don’t have to get out of the way at a bull market top immediately when you see these things happening; you have time. What we have here in this correction is a transitory supply shock issue, where the world’s most populous country has quarantined over 60 million people, and they can’t go to factories. They’re beginning to now as they’re getting this under control, but for a multi-week period, they couldn’t go into work and produce things. So it wasn’t demand implosion. It was the fact that demand cannot be satisfied from production and supply, and the market will look through that. So you get this V-shaped, early decline in activity, but it comes back on as soon as people go back to the factory, all of a sudden that demand resurfaces. And so that’s more what we’re looking at here and why we remain positive.

Scott Sturgeon: That makes sense. So I guess really the question then becomes, what’s the angle of that V? Is it very sharp? Is it more of a kind of a gradual, not necessarily a curve to it, but overall, the question being in what time frame do we expect some of that supply chain to come back online? When are we then able to meet orders and things of that nature. I guess my next question to you then is, it seems like out of China, at least, that cases have started to, new cases at least, have semi-tapered off, at least that’s the data that’s coming out from them. What do you think we can generally expect from markets in response to hopefully a lot of more Western countries, we’re seeing maybe some exposure there, but somewhat contained or to some degree, at least addressing the ongoing issue. What do you see responses from markets being like in the next quarter, two quarters, that kind of time frame?

Jeff Krumpelman: Yes, I think that’s a great question. And just to go back to your comment, the question is it a V, is it a U, some folks talk about the L shape kind of potential pattern here. You know, my mom said moderation in all things as I was growing up, God bless her, she’s 94-years-old and still going strong.

Scott Sturgeon: She sounds like a smart lady.

Jeff Krumpelman: She is a smart lady, and she’s following the coronavirus, and we actually talk about this kind of stuff.

You know, I would tend to say it would be more of the U shaped pattern. We wouldn’t expect some sharp V necessarily, because things are coming back slowly as folks go back to work in China. But I don’t think it really matters. I think just inflection, stabilization and a trend that begins to move in a positive direction is all that we need to see. You could see that yesterday where folks just started saying, “Hey, central banks might come to the rescue here and help at least a little bit.” And we have the largest gain in the history of the Dow on record, just from that. So, I think you could get this curl spring reaction in the market if we just see stabilization and things moving in the right direction.

Jeff Krumpelman: We do think the first half will be slower. I talked to Bill Greiner, I talked to all the members of the investment committee, and we talk about these things. We would see the first half of the year, GDP in the U.S. being slower, probably in the order of 1%, whereas we’re looking more like 1 or 2% for the entire year. So, you have a stronger second half of the year and that this will be a Q1, Q2 thing with improvement really starting in Q3, Q4. All that being said, we have to estimate the pattern of the economy and earnings, but we also, as investors, have to think about the psychology of the investor. And psychology can move things. So, what we’re doing is expecting higher volatility. You saw today when the market looked like the implied open was going to be strong and then we got two cases that were announced, in New York it opens in the red. And I think this kind of volatile trading pattern even emphasized or exaggerated by the algorithmic traders, you have to be ready for that. And so, we would expect a nice close to the year with a lot of volatility within the year.

Scott Sturgeon: So with that kind of wave, potential volatility in mind, what do you think, for the average investor, what should someone be mindful of going into kind of that pending rapid changes in markets, and potentially within their own individual portfolio?. Do you have general thoughts on things they should be doing or is now the time to put all the cash to work? Is it time to just put a pause and hold? Do you have a general thought on that at all?

Jeff Krumpelman: Absolutely, I think about it all the time. Very high level, I would tell you that during normal corrections we always like to say don’t mistake activity for progress. So, there’s this urge to do something. Buy. Sell. You know, whatever it is. And you do have camps out there that are saying, some heroically, this is an immediate buying opportunity. And you have other saying, no, no, no, this coronavirus thing is different. It’s different this time, you want to sell, and you want to raise cash. We don’t embrace either of those extreme strategies. In a correction you don’t want to sell because, by the time you sell, the market’s down 10% in a blink of an eye. And by the time you focus on buying, like yesterday, you tend to see these quick rallies and recoveries.

Don’t do the calorie burn. Exercise poise and hold your positions. We do think that corrections can provide opportunities to upgrade your portfolios. Certain pockets will be overly punished within equities, for example. And you might upgrade by trimming those that have held up. And fundamentals don’t appear as robust as you’d like and move into those that have been punished. And I also think that balance in a blend is important. Some people are saying, today, you ought to own cyclicals, run to all these highly economically sensitive stocks that have been punished and, when this recovers, they’re going to significantly outperform. What we found in this particular correction is, it’s been broad-based selling. And finally last week you had utilities and staples and the defensives capitulate and sell off. So, we do think that there are a number of opportunities to upgrade.

I do happen to think that some of these more defensive names and utilities, healthcare for example, there are opportunities where you’ve got really nice yields. These are high quality names that have been punished. Like a Micron Technology has. So we see opportunities to get some nice dividend growth- oriented names, either through strategies or individual stocks, into the portfolio. But that’s kind of getting cute. I’m not suggesting that you put a whole bunch of cash to work, that you sell bonds and buy stocks. I think you pretty much hold your position and make minor tweaks within. You’ve got to let your professional investment manager and wealth advisor guide you in doing that. I don’t think this is something for the amateur to really look at. So, that’s very different from bull market tops or bear market bottoms, where you do raise cash or put cash to work where you do move to defensives in a big way. Here, I think you hold your ground and make minor tweaks.

Scott Sturgeon: That makes a lot of sense. In reading through articles and through the internet, you see all kinds of investment suggestions and on these websites, you’re not paying anything for the information from it. One suggesting go out and buy shares of Zoom, the webinar software, or Peloton or Netflix just because they’re things that people are going to utilize because they have to stay at home. It seems like, you use the word cute, that’s what comes to mind for me at least. It seems like that’s kind of pandering to a not thought-through thesis and that perhaps having a professional investment advisor, really someone there to really have a strategic viewpoint for you in mind over the long term is going to be the best for the average layperson investor, at least from my perspective. It sounds like it’s your thoughts are as well.

Jeff Krumpelman: I would agree with you. Now as the professional investor, we did do just a couple of those “cute” things, because value had built up so much. But I just think your point is great. We hear it, whether it’s coronavirus or it’s the election. Many times I hear, “this is different,” and that’s way overused. Think about that was used back in 2016, when Trump was running and how this was going to be a totally different environment, we’ve never seen this before. Each election has an interesting angle to it, but you can never say this is unprecedented, and I don’t generally see unprecedented movements in the market. Presidential election cycle years are pretty predictable into the pies with regard to the pattern or behavior, as long as the economy is in decent shape.

But everyone wants to go, if this person gets in, shouldn’t we be buying or shorting energy? Shouldn’t we be buying or shorting healthcare stocks? With all these different super cute thematic angles, and at the end of the day, to us, it really comes down to fundamentals. Fundamentally, is policy going to shift so much that it’s truly going to affect earnings in those categories? Generally, the answer to that is no. You get gridlock, you don’t get sweeps, and it doesn’t move the earnings dial, yet it does temporarily move the psychology dial. So these are quick trades, and they’re unwound within weeks of the new party coming into power, and you go back to fundamentals. So don’t overthink it. Work with your professional advisor who is focused on the fundamentals of valuation and the technical price trends and they can make these well-researched decisions as opposed to just fads. You know, are khaki pants going to be in? Well, maybe, and you want to get caught up in that.

Scott Sturgeon: That’s true. Pleats, no pleats, I don’t know. Fashion is above my pay grade for sure. Jeff, I think those are all excellent points, and you really do drive it home, that working with a professional can really pay off over the longer term. I love your analogy of the wall of worry. All of these things are constantly thrown out as potentially the thing that’s going to unravel the economy or the markets or what have you. Having an advisor there, someone to really give you a leg up in getting over those issues, to really jump over that wall of worry. I love that analogy.

Jeff Krumpelman: Scott, I appreciate that, and there’s a reason why they say the market climbs the wall of worry. That old adage. Because that’s exactly what it does. The time to worry is when there is no wall of worry, because that means everybody’s in and there is no additional dollar to be made. So, that’s how I would leave it with you. Appreciate the dialogue and embrace the wall of worry because that says people are respectful of risk and there’s more money to be made.

Scott Sturgeon: Definitely. Well Jeff, all great insights. We want to thank you again so much for taking the time to come on, getting all your thoughts and processes on how to really deal with some potentially scary things, but then really providing a good clear insight and some good perspective on where we actually stand.

Jeff Krumpelman: Thanks a lot Scott. I appreciate being on here and it’s always a pleasure to have a chance to talk during times like stress and uncertainty here, and I hope it helps, but I appreciate it.

Scott Sturgeon: Really appreciate that Jeff. Well that’s about all the time we have for today. To our listeners, we want to thank you again for taking the time to listen to us. As always, if you have questions or suggestions for future podcast topics, we’re always welcoming of those. You can reach out to us at [email protected] to provide those suggestions. Thanks for listening.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

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