The coronavirus (COVID-19) has entered all of our lives in the most unsettling way. There is no knowing how extensive or dangerous its spread will be, but it is clearly a major concern and we wanted to let you know how we at Klingenstein Fields are dealing with it.
First, let us assure you that, at the operational level, it will be business as usual. We can’t exclude the possibility that our workforce will be impacted, as others’ will be, but we have for some years confronted cyber security and other threats to our operations, and we have in place careful business continuity plans. We’re happy to detail them further for you, but suffice it to say that your accounts are secure, as is your access to them. We will be there at the other end of the phone for whatever you need.
As of this writing, the market is in the grip of panic selling and the major stock market indices are now down more than 15% from their highs—having touched technical threshold for a bear market. This fall into bear market territory has happened more quickly than any other previous peak-to-bear market descent. Drivers of the sharp reversal include the expanded threat of the coronavirus with its attendant grinding down of business and consumer activity around the globe. This in turn has fueled a rally in US Treasury bonds, resulting in unprecedented low yields of under 0.5% on the 10-year bellwether bond and at all other maturities. Also rattling the market is the breakdown of the OPEC/non-OPEC oil production agreement. Oil prices have been slashed by over 35% since mid-February.
The critical question is whether or not this seemingly indiscriminant selling is an overreaction and, if so, should investors begin to take advantage of sharply lower prices.
Our view is that while there is likely to be continued selling, the brunt of the downdraft is behind us. Here’s why: first, as dangerous as the coronavirus is, when strong public health measures are taken some level of control can be achieved. That seems to be the case for China, South Korea and Taiwan, all of which report a declining level of new cases of the virus. In addition, we are heading into warmer weather, which is said to be less accommodative to its spread. Second, policy makers are beginning to take meaningful actions to ensure that plenty of financial liquidity is available. The Federal Reserve has already cut the fed funds rate and will likely do so again in the coming weeks. It has also announced a $150B injection into the repo market. The Treasury Department is working on a package that may include fiscal relief.
If the virus can be fairly well contained by mid-to-late summer, it may not forestall a possible 2020 recession but should make one relatively short-lived. One reason for this is the current tight employment market, which may make employers think twice before laying off workers.
So, for long-term investors with excess cash there is reason to consider stepping into the market. Some may be more comfortable waiting for another leg down and some additional confirmation that the spread of the coronavirus is beginning to ebb.