7 Steps to Survive Coronavirus Sell-Offs
As a cinephile, I often make allusions to movies. Well, if the stock market these days were a movie, it would be directed by Quentin Tarantino.
Bloody carnage has afflicted global stocks over the last few days, as the spreading coronavirus epidemic fuels fears of economic damage. The Dow Jones Industrial Average yesterday dropped by more than 1,000 points for only the third time in its history.
After the opening bell Tuesday morning, the three main U.S. stock market indices began trading in the green, as investors bet that the Federal Reserve would cut interest rates to offset the coronavirus.
But the trading this morning has been choppy, with stocks struggling to gain traction. By midday, the three main indices had all veered into negative territory, with the Dow down by more than 200 points.
My view is that hopes for another rate cut are delusional. Fed Chair Jerome Powell has made it clear that the U.S. central bank would probably stand pat this year because the fundamentals don’t warrant more stimulus. The virus is unlikely to change the Fed’s prudent course.
When Wall Street finally faces the reality that further monetary easing isn’t on the way, the stock market’s multi-day swoon is likely to resume.
The following chart traces the downward path of the S&P 500 since last Thursday, when it became all too apparent that the coronavirus was taking a worsening toll in human life and suffering (see chart).
Sure, stocks over the long term have historically bounced back from even the worst downturns. But as economist John Maynard Keynes famously said: “In the long run, we are all dead.”
What did this giant of the economics field mean by his oft-quoted remark? Simply this: Immediate financial needs often can’t wait for historical inevitability.
In these perilous market conditions, if you’re a new retiree or getting ready for your golden years, you must emphasize preservation of capital without incurring a disproportionate opportunity cost.
I’m not an alarmist by nature, but there’s no sense in denying reality. Investors are recklessly underestimating a wide array of risks, including trade war, high valuations, and a sputtering global economy.
Leading up to the recent plunge in equities, investors were underestimating the coronavirus epidemic, too.
It’s not just the coronavirus that could trigger a 10% correction. Trade tensions ostensibly eased in recent weeks, with the signing of the “phase one” trade deal between the U.S. and China. As I’ve previously written, I think the deal is hollow and it’s absurd for the U.S. to claim victory in the trade war.
The U.S. and China remain embroiled in a new cold war that’s likely to clobber investors with “blowback” at some point down the road.
Tariffs raise input costs and dampen economic activity. No one wins a trade war, especially when it’s being waged by the world’s two largest economies. Trade “truces” so far have mostly represented public relations rather than substance.
Fourth-quarter 2019 earnings results have revealed the damage from tariffs on corporate bottom lines. Exacerbating this damage is the coronavirus, which undercuts factory activity, worker productivity and consumer demand. The virus also wreaks havoc with supply chains, which already endure strain from unpredictable tit-for-tat tariffs. Companies are downgrading earnings guidance for Q1.
Let’s be clear: I’m not one of those professional prophets of doom who’ve been predicting the collapse of global capitalism ever since President Nixon took the U.S. dollar off the gold standard in 1971.
You can simultaneously stay in the game, while preparing for the worst, by taking these seven “crash proof” measures now.
1) Recalibrate your asset allocations.
The year 2020 promises to be uncertain, with choppy trading and sell-offs ahead. Your capital preservation strategy should include the right asset allocation, tailored to your financial goals.
Asset allocation is an art as well as a science. It’s the investment alchemy whereby you balance several ingredients for the proper admixture of risk and reward. If you’re too heavily weighted towards risky growth stocks, you could pay a steep price in the coming months if many analysts are correct and an economic downturn occurs.
According to some financial industry studies, about 90% of portfolio performance is related to asset allocation. That’s an eye-opening statistic.
Of course, in a bull market, your allocation should emphasize stocks. In a bear market, you should lighten up on stocks in favor of bonds and cash. And in a transitional market that’s “in between,” you should strike a balance. At all times, your portfolio should steer clear of overvalued equities.
Keep plenty of cash on hand, for the bargains that are sure to arise if and when the market crashes. As we experience the late stage of the economic expansion, rotate toward defensive sectors (see chart).
2) Make sure your portfolio contains gold.
Geopolitical turmoil and trade war uncertainties have propelled the price of gold in recent months. Gold probably has further to run.
The rule of thumb is for an allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself. I discuss how to buy gold bullion in my January 16 column.
3) Go to bonds for ballast.
In turbulent waters, bonds can help steady the ship. You may be a growth investor and still several years from retirement, but in this late stage of the economic cycle, don’t give short shrift to fixed-income.
You should be rotating toward safe havens. I recommend bond funds, for greater diversification. Notably, short-term bonds are less vulnerable to interest rates than longer-term bonds.
4) Decrease your portfolio’s weighting in cyclicals.
This is no time to be heavily weighted in cyclical sectors, such as consumer discretionary goods. During this latter stage of the economic expansion, rotate into non-cyclical, more stable companies that provide services that are consistently used regardless of market or economic conditions.
Utilities and real estate stocks are great examples. Indeed, the utility sector has been on a tear so far this year. The outperformance of utilities should continue as investors seek safe havens.
5) Diversify among asset categories.
Spread your portfolio among value, large-cap, mid-cap, small-cap, growth and income stocks. One often ignored move is to invest in mid-caps, which provide greater growth potential than large caps but less risk than small caps. A mid-cap is generally defined as a company with a market capitalization between $2 billion and $10 billion.
6) Seek global diversification.
Don’t withdraw from the world stage and become a parochial investor. To be sure, emerging markets are grappling with multiple crises, but the global diversification imperative applies to all geographic regions and countries.
Underappreciated overseas investment destinations right now include South Korea, Vietnam, and Taiwan.
7) Add quality dividend stocks.
Dividend-paying stocks are proven tools for long-term wealth building, but they’re also safe harbors because companies with robust and rising dividends by definition sport the strongest fundamentals.
If a company has strong enough cash flow (and sufficiently low debt) to generate high and growing dividends, it also means that the balance sheet is inherently solid enough to sustain the company through the sort of uncertainty that bedevils investors today.
For a “dividend map” that pinpoints the best high-yielding stocks, click here now.
Questions about portfolio protection? I’m here to help: email@example.com
John Persinos is the editorial director of Investing Daily.