March 5, 2020
The macroeconomy, credit conditions, capital markets, and politics are all flashing warning signs that the capital markets may be near an inflection point. COVID-19 may be the tipping point that triggers the what’s-this-worth question many investors ask all at once. Under market pressure, what is your portfolio really worth?
March 10, 2020
Over the last few weeks, markets have plummeted as the coronavirus has rapidly spread beyond China, crystalizing global demand and supply fears. Equity markets are near a technical bear market, US bonds are flashing never-seen-before rates, crude oil prices have fallen almost an order of magnitude, and volatility has spiked. In times of market turbulence, a steady hand at the tiller can win the race over the long run.
These types of market events, often termed crises, have happened every 10 years over the last half-century. To experience them is shocking, but they give investors a chance to reassess which markets are newly expensive and which are newly cheap. Now is not the time to panic, but rather a time to rebalance into new bargain-priced financial assets. Market volatility can actually serve investors well, particularly those with longer investment horizons and a patient approach to trading into opportunities.
On March 9, 2020, the market sentiment’s turn from greed to fear led to the following:
The 2020 market collapse, very likely the beginning of a bear market, has been much faster than the starts of prior bear markets. While markets generally plunge faster than they rise, the US stock market has turned back—so far—only to January 2019 levels, heights newly reached just a year ago. In other words, the US stock market has given back the returns it produced over a year that many—including us—thought was too good to be true or at least to be supported by reliable go-forward economic fundamentals and sensible valuations. Expensive markets tend to fall further than reasonably priced markets, all else equal. US stocks were priced to tolerate good news only; the very bad news of the coronavirus was a tipping point. So far, the US stock market, trading at extremely high valuation premiums relative to its own history and to multiple other developed markets, has been driven much lower than its emerging market counterparts.
The coronavirus pandemic is a textbook catalyst, a shock that arrives unexpectedly and is virtually impossible to identify in advance. Its spread is global, and its infection rate may be meaningfully underreported. As investors are realizing, the coronavirus is disrupting supply chains and thus payments, almost certainly leading to bankruptcies among weaker corporations. The coronavirus, likely a concern over the next three to six months, is unlikely to be a headwind over the next three to six years. Equity investors buy claims to decades of future cash flows, which stretch well beyond the relatively short-term impact of the coronavirus.
We are strong believers that long-horizon mean reversion is one of the largest and most persistent investment opportunities and that a contra-trading discipline adds value over the long term. Even though contrarian investors favor cheaply priced and unloved assets, purchasing more of the assets whose prices have fallen can be very painful. At Research Affiliates, we rely on model-driven processes to ensure a contrarian buying discipline and to institutionalize the courage to make these uncomfortable, but in our view, wise trades.
Predicting when markets will turn is impossible. Instead, we believe in anchoring investment decisions to reliable long-term expected returns across asset classes, starting with differentiating expensive markets from cheap ones. Many assets are now far more attractively priced than they were just a few weeks ago. Risk premiums have risen, creating opportunities for long-term investors to average into bargains and pare back exposures to more expensive assets.