Q&A: The Market Meltdown, Portfolio Hedges…and More
Welcome to the coronapocalypse.
Any doubt that the coronavirus epidemic is a “black swan event” should be gone from your mind. Global stock market benchmarks are in the tank, with the three main U.S. indices suffering severe multi-day losses.
The Dow Jones Industrial Average on Thursday posted its largest one-day point drop in history. Both the Dow and the S&P 500 index are officially in correction territory. The S&P 500 is currently more than 12% below the all-time high it set a week ago.
The rout continued Friday. All three main indices opened sharply lower today, with the Dow down by more than 1,000 points in early trading. We’re witnessing the worst week since October 2008, when the Great Financial Crisis was deepening.
The trigger for the 2008 crash was the collapse of the sub-prime housing market. This time around it’s the proliferating coronavirus, for which leaders around the world seem woefully unprepared. Analysts are making dire forecasts about the disease’s likely damage to corporate earnings and economic growth.
Brace yourself for further volatility. The CBOE Volatility Index (VIX), aka “fear index,” shot 42.1% higher yesterday. Over the last few days, the VIX has posted extreme gyrations not seen since the stock market meltdown of 2008. The index has more than doubled since last week, topping the 39 level for a two-year high.
Accordingly, I hope you’ve been following my consistent advice in recent months to boost the hedges portion of your portfolio. I’ve been warning that stocks were overvalued and a correction would occur in 2020.
My readers are understandably nervous, so now’s a good time to answer your letters. Let’s start, appropriately enough, with a question about portfolio hedges.
Bulwarks against risk…
“Your pie chart has a 25% allocation for hedges. Could you expand on that? What do you mean by ‘hedges’? — Thomas O.
The reader’s question refers to the following guidelines:
“Hedges” include precious metals, such as gold and silver. Gold is a proven shelter during uncertain times and it’s not too late to add some to your portfolio. Gold has experienced a healthy run-up in prices over the past year. However, the rally in the Midas metal should continue, as the coronavirus rapidly spreads and risk assets get pummeled.
Don’t ignore silver. The white metal tends to be less volatile than gold because it sports several industrial uses. Also consider additional safe havens, such as stable dividend-paying stocks.
Another well-positioned hedge now is agriculture. Fact is, the financial press tends to ignore agriculture. After all, it’s not as sexy as the high-tech “story stocks” that the carnival barkers on CNBC like to prattle on about. But agriculture has the properties of a late-cycle investment because of the sector’s projected robust and stable growth for decades to come. And in recent days, those glamorous story stocks have gotten slaughtered.
Resist the temptation to hunt for bargains among battered growth stocks. A bottom to the stock market swoon isn’t in sight. The longer the coronavirus continues to infect and kill people, the greater the damage to important growth drivers such as China.
The damage we’re witnessing from the coronavirus is probably just the tip of the iceberg. Research firm FactSet (the data provider for Investing Daily) in recent days has reported that an increasing number of managers on fourth-quarter earnings calls are citing the coronavirus as a negative factor weighing on future guidance. The virus still has longer to play out. Make sure your portfolio is properly hedged.
Federal Reserve to the rescue?
“Do you think the Federal Reserve will cut interest rates in response to the recent stock market collapse?” — Paul G.
In a word, no. Fed Chair Jerome Powell is under pressure to stimulate the economy right now because of economic damage wrought by the coronavirus, but he probably won’t cave. Further monetary easing would tie the Fed’s hands if a recession occurs.
More to the point, the coronavirus is disrupting global supply chains and weighing on manufacturing activity, problems that can’t be solved by lowering rates. Monetary policy in the U.S. can’t get infected employees around the world back to work.
The dangers of robo-trading…
“Do you think passive, algorithmic trading is making the current stock market decline even worse?” — Alan S.
Yes, there’s evidence that so-called robo-trading has worsened the stock market’s free-fall in recent days. Exchange-traded funds (ETFs) that track financial indexes have become a major factor for the recent volatility in stocks. These funds act as accelerants, up or down.
During the 2008 global financial meltdown, regulators were blindsided by how derivatives exacerbated the crisis. The 2010 flash crash occurred as a result of automated programs that manipulated the market.
As you’d expect, Wall Street learned nothing from these debacles. Despite these risks, there’s been a proliferation of inexpensive passive funds that are governed by algorithms.
Let’s face it: the investment game is rigged against average retail investors. The insiders on Wall Street have secret tools at their disposal and they’re not about to share them with you.
But you can fight back. My colleague Jimmy Butts, chief investment strategist of the premium trading service Top Stock Advisor, has devised an investment system that beats the “Big Boys” at their own game.
Jimmy’s advice consistently makes money, in up or down markets. For his latest recommendations, click here now.
John Persinos is the editorial director of Investing Daily. Send your comments and questions to: firstname.lastname@example.org